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Corporate taxation and financial strategies under asymmetric information

Author

Listed:
  • Francesco Cohen

    (University of Brescia)

  • Alessandro Fedele

    (Free University of Bozen/Bolzano)

  • Paolo M. Panteghini

    (University of Brescia, CESIFO and AccounTax Lab)

Abstract

In this article, we study the effects of corporate taxation on credit market equilibria in presence of asymmetric information. We develop a screening model that accounts for the following five facts: the existence of a tax incentive to borrow, the presence of asymmetric information in credit markets, the screening activity of lenders, the negative relationship between leverage and profitability, and the business cycle effects on the spread between high-yield and investment-grade interest rates on corporate loans. Assuming the existence of two types of firms, we show that either a separating or a pooling credit market equilibrium can arise, depending on the level of taxation. Finally, we analyze the joint effects of business cycle and taxation on the credit market equilibrium.

Suggested Citation

  • Francesco Cohen & Alessandro Fedele & Paolo M. Panteghini, 2016. "Corporate taxation and financial strategies under asymmetric information," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 33(1), pages 9-34, April.
    • Handle: RePEc:spr:epolit:v:33:y:2016:i:1:d:10.1007_s40888-016-0025-3
    DOI: 10.1007/s40888-016-0025-3
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    Cited by:

    1. Nicola Comincioli & Paolo M. Panteghini & Sergio Vergalli, 2021. "Welfare effects of business taxation under default risk," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(6), pages 1412-1429, December.
    2. Nicola Comincioli & Sergio Vergalli & Paolo Panteghini, 2019. "Business tax policy under default risk," CESifo Working Paper Series 7664, CESifo.
    3. Francesco Cohen & Alessandro Fedele & Paolo M. Panteghini, 2016. "Corporate taxation and financial strategies under asymmetric information," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 33(1), pages 9-34, April.

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    More about this item

    Keywords

    Corporate taxation; Credit market equilibria; Asymmetric information;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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