Advanced Search
MyIDEAS: Login to save this paper or follow this series

How Big is the Tax Advantage to Debt?

Contents:

Author Info

  • Alex Kane
  • Alan J. Marcus
  • Robert L. McDonald

Abstract

This paper uses an option valuation model of the firm to answer the question, "What magnitude tax advantage to debt is consistent with the range of observed corporate debt ratios?" We incorporate into the model differential personal tax rates on capital gains and ordinary income. We conclude that variations in the magnitude of bankruptcy costs across firms can not by itself account for the simultaneous existence of levered and unlevered firms. When it is possible for the value of the underlying assets to junip discretely to zero, differences across firms in the probability of this jump can account for the simultaneous existence of levered and unlevered firms. Moreover, if the tax advantage to debt is small, the annual rate of return advantage offered by optimal leverage may be so small as to make the firm indifferent about debt policy over a wide range of debt-to-firm value ratios.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/papers/w1286.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1286.

as in new window
Length:
Date of creation: Jun 1985
Date of revision:
Publication status: published as Kane, Alex, Alan J. Marcus and Robert L. McDonald. "How Big is the Tax Advantage to Debt?" Journal of Finance, Vol. 39, No. 3, (July 1984), pp. 841- 853.
Handle: RePEc:nbr:nberwo:1286

Note: ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Moyen, Nathalie, 2007. "How big is the debt overhang problem?," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 31(2), pages 433-472, February.
  2. Kane, Alex & Marcus, Alan J. & McDonald, Robert L., 1985. "Debt Policy and the Rate of Return Premium to Leverage," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 20(04), pages 479-499, December.
  3. Andrea Gamba & Leon Gordon & Carmen Aranda Leon, 2008. "Investment Under Uncertainty, Debt and Taxes," Working Papers, Warwick Business School, Finance Group wpn08-03, Warwick Business School, Finance Group.
  4. Sinha, Pankaj & Bansal, Vishakha, 2013. "Capital structure puzzle: the interrelationship between leverage, taxes and other micro economic factors," MPRA Paper 49878, University Library of Munich, Germany, revised 17 Sep 2013.
  5. Hayne E. Leland., 1998. "Agency Costs, Risk Management, and Capital Structure," Research Program in Finance Working Papers, University of California at Berkeley RPF-278, University of California at Berkeley.
  6. Strebulaev, Ilya A. & Whited, Toni M., 2012. "Dynamic Models and Structural Estimation in Corporate Finance," Foundations and Trends(R) in Finance, now publishers, vol. 6(1–2), pages 1-163, November.
  7. Kristoffer J. Glover & Gerhard Hambusch, 2014. "The trade-off theory revisited: on the effect of operating leverage," International Journal of Managerial Finance, Emerald Group Publishing, Emerald Group Publishing, vol. 10(1), pages 2-22, January.
  8. DeAngelo, Harry & DeAngelo, Linda & Whited, Toni M., 2011. "Capital structure dynamics and transitory debt," Journal of Financial Economics, Elsevier, Elsevier, vol. 99(2), pages 235-261, February.
  9. Martin Dózsa & Jakub Seidler, 2012. "Debt Contracts and Stochastic Default Barrier," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 2012/17, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2012.
  10. Pascal Francois, 2006. "Tax loss carry-forwards and optimal leverage," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(14), pages 1075-1083.
  11. Ilya A. Strebulaev, 2007. "Do Tests of Capital Structure Theory Mean What They Say?," Journal of Finance, American Finance Association, American Finance Association, vol. 62(4), pages 1747-1787, 08.
  12. Mehdi Elhaei Sahar & Seyed Ali Vaez, 2013. "Information Asymmetry and Financing Decisions: Evidence from Iran Stock Exchange," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 3(3), pages 105-110, July.
  13. Nengjiu Ju & Robert Parrino & Allen M. Poteshman & Michael S. Weisbach, 2002. "Horses and Rabbits? Optimal Dynamic Capital Structure from Shareholder and Manager Perspectives," NBER Working Papers 9327, National Bureau of Economic Research, Inc.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1286. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.