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Corporate Taxation and Financial Strategies Under Asymmetric Information

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  • Francesco Cohen
  • Alessandro Fedele
  • Paolo Panteghini

Abstract

In this article we study the corporate tax effects on credit market equilibria. In particular, we develop a model that accounts for five pieces of evidence: i) the existence of a tax incentive to borrow, ii) the negative relationship between leverage and profitability, iii) the existence of asymmetric information in credit markets, iv) the screening activity of lenders and v) the business cycle effects on the spread between the high-yield and the 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. More importantly, the equilibrium is crucially affected by corporate taxation. Given these results, we also provide a welfare analysis and discuss corporate tax policy implications.

Suggested Citation

  • Francesco Cohen & Alessandro Fedele & Paolo Panteghini, 2014. "Corporate Taxation and Financial Strategies Under Asymmetric Information," CESifo Working Paper Series 4772, CESifo.
  • Handle: RePEc:ces:ceswps:_4772
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    References listed on IDEAS

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    Cited by:

    1. Nicola Comincioli & Sergio Vergalli & Paolo Panteghini, 2019. "Business tax policy under default risk," CESifo Working Paper Series 7664, CESifo.
    2. 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.

    More about this item

    Keywords

    capital structure; corporate taxation; asymmetric information;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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