Asymmetric Information, Capital and Ownership Structures and Corporate Income Taxation

Kwang Soo Cheong ()

No 199904, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: This paper develops a signaling model to investigate a firm's optimal financial response to corporate income taxation under informational asymmetries. The model obtains informationally constrained efficient equilibria in which a firm's debt level and inside equity position jointly serve as a single separating signal. Separating equilibria are characterized differently depending upon the tax obligation and the relative profitability of a high-quality firm. When the quality difference between firms is relatively large, a high-quality firm shows a unique optimal capital structure, in which the debt-equity ratio is increased as the tax rate rises but is reduced as the firm's profitability increases.

Keywords: Corporate Income Taxation; Capital Structure; Asymmetric Information (search for similar items in EconPapers)
JEL-codes: D82 G32 H25 (search for similar items in EconPapers)
Pages: 35 pages
Date: 1999
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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