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Corporate Debt, Hybrid Securities and the Effective Tax Rate

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Author Info
Paolo Panteghini ()

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Abstract

In this article we use contingent-claim analysis to calculate the effective tax rate (ETR) under corporate debt finance. In particular, we deal with both pure debt and two of the most well-known hybrid securities, i.e., convertible, and reverse convertible bonds. We show that: 1) effective taxation crucially depends on the characteristics of debt, and 2) existing measures of ETR can be dramatically biased, since they do not account for debt maturity, default risk or the ability to convert debt into equity.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2329.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2329

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Related research
Keywords: capital structure; contingent claims; corporate taxation; hybrid securities;

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Find related papers by JEL classification:
H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

References listed on IDEAS
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  1. Panteghini, Paolo M., 2007. "Interest deductibility under default risk and the unfavorable tax treatment of investment costs: A simple explanation," Economics Letters, Elsevier, vol. 96(1), pages 1-7, July. [Downloadable!] (restricted)
  2. Ingersoll, Jonathan E, Jr, 1977. "An Examination of Corporate Call Policies on Convertible Securities," Journal of Finance, American Finance Association, vol. 32(2), pages 463-78, May. [Downloadable!] (restricted)
  3. Ricardo J. Caballero & Eduardo M.R.A. Engel, 1996. "Explaining Investment Dynamics in U.S. Manufacturing: A Generalized (S,s) Approach," Documentos de Trabajo 12, Centro de Economía Aplicada, Universidad de Chile.
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  4. Yildirim, Yildiray, 2006. "Modeling default risk: A new structural approach," Finance Research Letters, Elsevier, vol. 3(3), pages 165-172, September. [Downloadable!] (restricted)
  5. Goldstein, Robert & Ju, Nengjiu & Leland, Hayne, 2001. "An EBIT-Based Model of Dynamic Capital Structure," Journal of Business, University of Chicago Press, vol. 74(4), pages 483-512, October. [Downloadable!] (restricted)
  6. Branch, Ben, 2002. "The costs of bankruptcy: A review," International Review of Financial Analysis, Elsevier, vol. 11(1), pages 39-57. [Downloadable!] (restricted)
  7. Brennan, M J & Schwartz, Eduardo S, 1977. "Convertible Bonds: Valuation and Optimal Strategies for Call and Conversion," Journal of Finance, American Finance Association, vol. 32(5), pages 1699-1715, December. [Downloadable!] (restricted)
  8. Roger Gordon & Laura Kalambokidis & Joel Slemrod, 2003. "A New Summary Measure of the Effective Tax Rate on Investment," NBER Working Papers 9535, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Robin Boadway & Neil Bruce & Jack Mintz, 1984. "Taxation, Inflation, and the Effective Marginal Tax Rate on Capital in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 17(1), pages 62-79, February. [Downloadable!] (restricted)
  10. Christopher A. Hennessy & Toni M. Whited, 2005. "Debt Dynamics," Journal of Finance, American Finance Association, vol. 60(3), pages 1129-1165, 06. [Downloadable!] (restricted)
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  11. Michael P. Devereux, 2003. "Measuring Taxes on Income from Capital," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  12. McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-49, June. [Downloadable!] (restricted)
  13. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November. [Downloadable!] (restricted)
  14. Leland, Hayne E, 1994. " Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-52, September. [Downloadable!] (restricted)
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  15. McDonald, Robert L., 2004. "The tax (dis)advantage of a firm issuing options on its own stock," Journal of Public Economics, Elsevier, vol. 88(5), pages 925-955, April. [Downloadable!] (restricted)
  16. Panteghini, Paolo M., 2006. "S-based taxation under default risk," Journal of Public Economics, Elsevier, vol. 90(10-11), pages 1923-1937, November. [Downloadable!] (restricted)
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  17. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June. [Downloadable!] (restricted)
  18. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May. [Downloadable!] (restricted)
  19. Philippe Jorion & William N. Goetzmann, 1999. "Global Stock Markets in the Twentieth Century," Journal of Finance, American Finance Association, vol. 54(3), pages 953-980, 06. [Downloadable!] (restricted)
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