IDEAS home Printed from https://ideas.repec.org/p/flo/wpaper/2011-10.html
   My bibliography  Save this paper

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

    Download full text from publisher

    File URL: http://www.disei.unifi.it/upload/sub/pubblicazioni/repec/flo/workingpapers/storicodimad/2011/dimadwp2011-10.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Hayne E. Leland., 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Research Program in Finance Working Papers RPF-233, University of California at Berkeley.
    2. 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.
    3. Hayne E. Leland, 1998. "Agency Costs, Risk Management, and Capital Structure," Journal of Finance, American Finance Association, vol. 53(4), pages 1213-1243, August.
    4. Hayne E. Leland and Klaus Bjerre Toft., 1995. "Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Research Program in Finance Working Papers RPF-259, University of California at Berkeley.
    5. 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.
    6. 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.
    7. 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.
    8. 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, May.
    9. Gerber, Hans U. & Shiu, Elias S.W., 1994. "Martingale Approach to Pricing Perpetual American Options," ASTIN Bulletin: The Journal of the International Actuarial Association, Cambridge University Press, vol. 24(02), pages 195-220, November.
    10. John R. Graham & Clifford W. Smith, 1999. "Tax Incentives to Hedge," Journal of Finance, American Finance Association, vol. 54(6), pages 2241-2262, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:flo:wpaper:2011-10. 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: (Michele Gori). General contact details of provider: http://edirc.repec.org/data/defirit.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.