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Corporate Debt Value with Switching Tax Benefits and Payouts

Author

Listed:
  • 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.

Suggested Citation

  • Flavia Barsotti & Maria Elvira Mancino & Monique Pontier, 2011. "Corporate Debt Value with Switching Tax Benefits and Payouts," Working Papers - Mathematical Economics 2011-10, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    • Handle: RePEc:flo:wpaper:2011-10
    as

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    References listed on IDEAS

    as
    1. Sarkar, Sudipto, 2008. "Can tax convexity be ignored in corporate financing decisions?," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1310-1321, July.
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    3. Leland, Hayne E, 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-1252, September.
    4. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    5. Luis H. R. Alvarez, 2001. "Reward functionals, salvage values, and optimal stopping," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 54(2), pages 315-337, December.
    6. Hayne E. Leland, 1998. "Agency Costs, Risk Management, and Capital Structure," Journal of Finance, American Finance Association, vol. 53(4), pages 1213-1243, August.
    7. 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.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    structural model; corporate debt; endogenous bankruptcy; optimal stopping; tax benefits of debt;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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