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Corporate Debt Value with Switching Tax Benefits and Payouts

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  • Flavia Barsotti

    ()
    (Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze)

  • Maria Elvira Mancino

    ()
    (Dipartimento di Matematica per le Decisioni, Universita' degli Studi di Firenze)

  • Monique Pontier

    ()
    (Institut Mathem. de Toulouse (IMT), University of Toulouse, France)

Abstract

This paper analyzes a structural model of corporate debt in the spirit of Leland (1994) model within a more realistic general context where payouts and asymmetric tax-code provisions are introduced. We analytically derive the value of the tax benefit claim in this context and study the joint effect of tax asymmetry and payouts on optimal corporate financing decisions. Results show a quantitatively significant impact on both optimal debt issuance and leverage ratios, thus providing a way to explain differences in observed leverage across firms.

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Bibliographic Info

Paper provided by Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa in its series Working Papers - Mathematical Economics with number 2011-10.

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Length: 30 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:flo:wpaper:2011-10

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Keywords: structural model; corporate debt; endogenous bankruptcy; optimal stopping; tax benefits of debt;

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  1. Leland, Hayne E & Toft, Klaus Bjerre, 1996. " Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Journal of Finance, American Finance Association, vol. 51(3), pages 987-1019, July.
  2. Hayne E. Leland., 1998. "Agency Costs, Risk Management, and Capital Structure," Research Program in Finance Working Papers RPF-278, University of California at Berkeley.
  3. 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.
  4. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  5. Sudipto Sarkar & Levon Goukasian, 2006. "The Effect of Tax Convexity on Corporate Investment Decisions and Tax Burdens," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 8(2), pages 293-320, 05.
  6. John R. Graham & Clifford W. Smith, 1999. "Tax Incentives to Hedge," Journal of Finance, American Finance Association, vol. 54(6), pages 2241-2262, December.
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