The Debt-Equity Distinction: A Century of Policy by Accident
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Our debt-heavy architecture is not a thought-out tenet of academic finance. Instead, it is substantially a function of practical circumstance: the deductibility of interest payments on corporate debt from pretax profits. That simple reality makes debt financing generally cheaper than raising equity. And while there are other reasons why businesses might want to use debt, especially the investment leverage that it provides to equity owners, the tax shield and the resulting lower “cost” of debt of
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