Therefore, debt coverage ability of a firm could be positively related with leverage. Hence, higher debt level increases bankruptcy cost and eventually the possibility of bankruptcy (Baral, 2004). Agency theory suggests that a firm can reduce agency cost by using more debt than equity. Thus, agency theory indicates that firm with greater debt service capacity use more debt and capitalize the opportunity to reduce agency cost of equity. Moreover, static trade-off theory suggests that optimal debt level is attained when present value of tax shield benefit completely offsets bankruptcy related cost of
Therefore, debt coverage ability of a firm could be positively related with leverage. Hence, higher debt level increases bankruptcy cost and eventually the possibility of bankruptcy (Baral, 2004). Agency theory suggests that a firm can reduce agency cost by using more debt than equity. Thus, agency theory indicates that firm with greater debt service capacity use more debt and capitalize the opportunity to reduce agency cost of equity. Moreover, static trade-off theory suggests that optimal debt level is attained when present value of tax shield benefit completely offsets bankruptcy related cost of