Corporate taxes, strategic default, and the cost of debt

Ali Nejadmalayeri () and Manohar Singh

Journal of Banking & Finance, 2012, vol. 36, issue 11, 2900-2916

Abstract: The current US tax code’s loss carry provisions provide implicit tax subsidies to financially troubled firms. Since shareholders ultimately decide when to announce bankruptcy, such tax subsidies can incentivize them to strategically postpone default. Therefore, corporate taxation can influence corporate cost of debt. Using a large panel of corporate bonds, we find supporting evidence: credit spreads become smaller as tax loss carries grow larger. In contrast, tax shields such as depreciation, which limit loss carry gains, lead to wider spreads. Interestingly, when stockholders hold greater bargaining power – due to large managerial ownership – larger corporate tax shields lead to even narrower credit spreads.

Keywords: Corporate tax; Credit spreads; Endogenous bankruptcy; Strategic default (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:36:y:2012:i:11:p:2900-2916

DOI: 10.1016/j.jbankfin.2011.07.021

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