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Capital Structure, Ownership, and Capital Payment Policy: The Case of Hospitals

Gerard Wedig, Frank A. Sloan, Mahmud Hassan and Michael A. Morrisey
The Journal of Finance
Vol. 43, No. 1 (Mar., 1988), pp. 21-40
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328320
Stable URL: http://www.jstor.org/stable/2328320
Page Count: 20
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Capital Structure, Ownership, and Capital Payment Policy: The Case of Hospitals
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Abstract

This study examines effects of pertinent features of hospital capital payment policies on hospital capital structure decisions in a one-period stochastic, value-maximization model. Separate models are developed for for-profit and not-for-profit hospitals. Hospital debt-to-assets ratios are analyzed empirically using a cross-section of data from the American Hospital Association. Although the effect on capital structure of hospital reliance on cost-based reimbursement cannot be signed theoretically, in both for-profit and non-profit cases, a higher cost-based share leads to higher leverage. Factors associated with high bankruptcy risk (e.g., earnings volatility) cause hospitals to take on less debt.

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