Tax benefit and bankruptcy cost of debt

Leandro Telles Ricca, Michele Nascimento Jucá and Eli Hadad Junior

The Quarterly Review of Economics and Finance, 2021, vol. 81, issue C, 82-92

Abstract: Different theories seek to substantiate the main determinants of companies’ capital structure. For the trade-off theory, there may be an optimal capital structure in which companies seek a balance between bankruptcy risk and tax benefits generated by the deduction of debt interest. Despite the relevance of both aspects, their joint analysis is not sufficiently studied. Thus, this study seeks to understand whether companies show conservative behavior in relation to their low leverage level. In addition, whether a possible non-optimizing of tax benefits, arising from indebtedness, is due to a higher ex-ante bankruptcy cost for the company or due to the existence of other non-debt tax benefits is intended to verify. For this purpose, tests are performed with simultaneous equations - generalized method of moments and ordered probit - and Tobit regression. The sample comprises non-financial publicly held Brazilian companies. Data are analyzed during the period from 2009 to 2018. As a result, both hypotheses are confirmed - H1 - Increased leverage results from higher debt tax benefits than ex-ante bankruptcy costs and H2 - Companies do not optimize debt tax benefits due to factors other than debt.

Keywords: Trade-off theory; Tax benefits; Bankruptcy risk; Simultaneous equations; Ordered probit regression; Tobit regression (search for similar items in EconPapers)
JEL-codes: G32 G33 H21 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1062976921000910
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:81:y:2021:i:c:p:82-92

DOI: 10.1016/j.qref.2021.05.003

Access Statistics for this article

The Quarterly Review of Economics and Finance is currently edited by R. J. Arnould and J. E. Finnerty

More articles in The Quarterly Review of Economics and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().