Financial Management: Principles and Applications, 13/e

15.3 Why Do Capital Structures Differ Across Industries?

Recall that in Figure 15.1 we showed that firms in different industries can have very different capital structures. For example, firms in the computer software industry tend to use very little debt in their capital structures, whereas firms in the casino and gaming industry tend to use much more financial leverage.

To understand these differences, we need to think carefully about the costs and benefits associated with including more debt in a firm’s capital structure. Let’s consider first the importance of corporate taxes, which lower the cost of debt financing relative to equity financing because interest is tax-deductible and dividends paid to stockholders are not. Firms in some industries, ...