The conclusions of our paper are as follows. From a theoretical perspective, there are reasons to believe that debt levels are not irrelevant, in the Modigliani-Miller sense that firm and economywide performance is independent of financial structure; rather, debt levels should be of concern to policymakers and others. However, the theoretical case is far from complete and awaits further development. Empirically, the results are mixed. If one believes that the large increases in equity values during the 1980s reflect good estimates of the present value of future corporate earnings, there appears to be little basis for concern. In this view, the postwar “debt crisis,” if there was one, occurred in 1974. However, measures of corporate debt burden on a current basis, such as the ratio of interest payments to cash flows, have deteriorated sharply, suggesting possible liquidity problems for the corporate sector. A sharp fall in equity values or some other adverse shock could imply a solvency problem as well. Because policymakers and economic analysts should be concerned with worst-case as well as “average” outcomes, our findings in this regard are worrisome.
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