A trade-off theory of ownership and capital structure

Giovanna Nicodano and Luca Regis ()

Journal of Financial Economics, 2019, vol. 131, issue 3, 715-735

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.

Keywords: Ownership; Leverage; Taxes; Thin capitalization; Groups (search for similar items in EconPapers)
JEL-codes: G32 H32 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:131:y:2019:i:3:p:715-735

DOI: 10.1016/j.jfineco.2018.09.001

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