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Securityholder Taxes, Corporate Capital Structures and the Priority Structures of Debt

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  • Kim, Chang-Soo
  • Mauer, David C

Abstract

This paper shows that the firm has an incentive to issue multiple classes of debt that are differentiated by seniority to enhance securityholder tax-timing option values. The analysis establishes that there is at least one mix of senior and junior debt that maximizes the tax option gain from having multiple priority classes of debt. An analytic example provides specifications for the optimal amount of leverage and the optimal mix of senior and junior debt. Relative to the case of only one class of debt, a multiple debt priority structure increases the optimal amount of corporate leverage. Copyright 1997 by MIT Press.

Suggested Citation

  • Kim, Chang-Soo & Mauer, David C, 1997. "Securityholder Taxes, Corporate Capital Structures and the Priority Structures of Debt," The Financial Review, Eastern Finance Association, vol. 32(3), pages 609-634, August.
    • Handle: RePEc:bla:finrev:v:32:y:1997:i:3:p:609-34
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    Cited by:

    1. Heather M. Hulburt & Frederick C. Scherr, 2003. "Determinants of the collateralization of credit by small firms," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 24(6-7), pages 483-501.
    2. Kubick, Thomas R. & Lockhart, G. Brandon, 2017. "Corporate tax aggressiveness and the maturity structure of debt," Advances in accounting, Elsevier, vol. 36(C), pages 50-57.

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