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A Trade-off Theory of Ownership and Capital Structure

Author

Listed:
  • Giovanna Nicodano

    () (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy)

  • Luca Regis

    () (Department of Economics and Statistics, University of Siena, Italy)

Abstract

This paper determines the optimal ownership share held by a unit into a second unit, when both face a tax-bankruptcy trade-off. Full ownership is optimal when the first unit has positive debt, because dividends help avoid its default. Positive debt is, in turn, optimal when its corporate tax rate exceeds a threshold; and/or Thin Capitalization Rules place an upper limit on the debt level in the second unit, and/or the Volcker Rule bans bailout transfers to the second unit. Full ownership is no longer optimal only if there is a tax on intercorporate dividend. This theory rationalizes observations on multinationals, financial conglomerates and family groups.

Suggested Citation

  • Giovanna Nicodano & Luca Regis, 2017. "A Trade-off Theory of Ownership and Capital Structure," Working papers 045, Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
  • Handle: RePEc:tur:wpapnw:045
    as

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    File URL: http://www.bemservizi.unito.it/repec/tur/wpapnw/m45.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Ownership; Leverage; Taxes; Thin Capitalization; groups; multinationals.;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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