Corporate Debt Value with Switching Tax Benefits and Payouts

Flavia Barsotti, Maria Elvira Mancino and Monique Pontier (monique.pontier@math.univ-toulouse.fr)
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Monique Pontier: Institut Mathem. de Toulouse (IMT), University of Toulouse, France

No 2011-10, Working Papers - Mathematical Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

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.

Keywords: structural model; corporate debt; endogenous bankruptcy; optimal stopping; tax benefits of debt (search for similar items in EconPapers)
JEL-codes: G32 G33 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2011-12
New Economics Papers: this item is included in nep-acc and nep-cfn
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Persistent link: https://EconPapers.repec.org/RePEc:flo:wpaper:2011-10

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