The value of the tax subsidy on risky debt

Article Abstract:

The relationship between leverage and firm value is examined for cases in which corporate tax is levied as an income tax, and tax shields that are not related to debt are available. Previous research has shown that the relationship between debt and firm value is concave when non-debt-related tax shields are available. There is as a result an interior optimal capital structure when there is a tax-induced differential in the cost of corporate debt. This study shows that if the interest alone is deductible, the debt-firm value relationship is convex. As a result, the capital structure problem will have a corner solution.

Management science, Management, Debt financing (Corporations), Debt financing, Capital

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Contract costs and financing decisions

Article Abstract:

A contract-cost hypothesis is presented to explain why debt-equity contract structures are common. The hypothesis stipulates that bonds and loans lower contract costs by assigning the bonding and monitoring of the default risks of fixed payoffs to financial intermediaries, rating agencies, or other credible specialists. As result of this situation, other agents do not have to monitor default risk and can focus on their areas of specialty.

Interpretation and construction, Contracts, Bonds, Bonds (Securities), Loans

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The interaction of corporate and government financing in general equilibrium

Article Abstract:

A general equilibrium model is developed for analyzing the interaction of corporate financial and production decisions, government financing, and consumer behavior. The model is then used to examine the effect of income tax rate changes and debt policy changes on production, consumer welfare, and interest rates. Changes in the different tax rates are shown to affect other tax rates in the general equilibrium.

Public finance, Tax rates

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