A Trade-off Theory of Ownership and Capital Structure

Giovanna Nicodano and Luca Regis ()

No 45, Working papers from Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino

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; multinationals. (search for similar items in EconPapers)
JEL-codes: G32 H32 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2017-12
New Economics Papers: this item is included in nep-pbe
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http://www.bemservizi.unito.it/repec/tur/wpapnw/m45.pdf First version, 2017 (application/pdf)

Related works:
Journal Article: A trade-off theory of ownership and capital structure (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:tur:wpapnw:045

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