Debt,Agency Costs,and Industry Equilibrium

We show that risk characteristics of projects' cash flows are endogenously determined by the investment decisions of all firms in an industry. As a result, in reasonable settings, financial structures which create incentives to expropriate debtholders by increasing risk are shown not to reduce value in an industry equilibrium. Without taxes, capital structure is irrelevant for individual firms despite its effect on the equityholders' incentives, but the maximum total amount of debt in the industry is determinate. Allowing for a corporate tax advantage of debt, capital structure becomes relevant but firms are indifferent between distinct alternative debt levels.     

Taxes, Leverage, and the Cost of Equity Capital

We examine the associations among leverage, corporate and investor level taxes, and the firm's implied cost of equity capital. Expanding on Modigliani and Miller [1958, 1963] , the cost of equity capital can be expressed as a function of leverage and corporate and investor level taxes. Based on this expression, we predict that the cost of equity is increasing in leverage, and that corporate taxes mitigate this leverage‐related risk premium, while the personal tax disadvantage of debt increases this premium. We empirically test these predictions using implied cost of equity estimates and proxies for the firm's corporate tax rate and the personal tax disadvantage of debt. Our results suggest that the equity risk premium associated with leverage is decreasing in the corporate tax benefit from debt. We find some evidence that the equity risk premium from leverage is increasing in the personal tax penalty associated with debt.     

Dividend Taxes and Implied Cost of Equity Capital

We estimate firm‐level implied cost of equity capital based on recent advances in accounting and finance research and examine the effect of dividend taxes on the cost of equity capital. We investigate whether dividend taxes affect firms' cost of capital by testing the relation between the implied cost of equity capital and a measure of the tax‐penalized portion of dividend yield, which we define as the product of dividend yield and the dividend tax penalty. The results generally support the dividend tax capitalization hypothesis. We find a positive relation between the implied cost of equity capital and the tax‐penalized portion of dividend yield that is decreasing in aggregate institutional ownership, our proxy for tax‐advantaged investors. The evidence in this study adds to the understanding of the effect of investor‐level taxes on equity value.     

Capital structure and international debt shifting

This paper presents a model of a multinational firm's optimal debt policy that incorporates international taxation factors. The model yields the prediction that a multinational firm's indebtedness in a country depends on a weighted average of national tax rates and differences between national and foreign tax rates. These differences matter as multinationals have an incentive to shift debt to high-tax countries. The predictions of the model are tested using a novel firm-level dataset for European multinationals and their subsidiaries, combined with newly collected data on the international tax treatment of dividend and interest streams. Our empirical results show that a foreign subsidiary's capital structure reflects local corporate tax rates as well as tax rate differences vis-à-vis the parent firm and other foreign subsidiaries, although the overall economic effect of taxes on leverage appears to be small. Ignoring the international debt shifting arising from differences in national tax rates would understate the impact of national taxes on debt policies by about 25%.     

Dynamic capital structure with callable debt and debt renegotiations

We consider a dynamic trade-off model of a firm's capital structure with debt renegotiation. Debt holders only accept restructuring offers from equity holders backed by threats which are in the equity holders' own interest to execute. Our model shows that in a complete information model in which taxes and bankruptcy costs are the only frictions, violations of the absolute priority rule (APR) are typically optimal. The size of the bankruptcy costs and the equity holders' bargaining power affect the size of APR violations, but they have only a minor impact on the choice of capital structure.     

Do Personal Taxes Destroy Tax Shields? A Critique to Miller’s (1977) Proposal

We discuss the relevance of personal taxes on tax shields. Interest and taxes are the basis for defining an optimal capital structure. When personal taxes are greater than or equal to TS, an optimal capital structure does not exist.

We suggest that the approach proposed by Miller (1977) might understate the effect of personal taxes in the net TS and/or its associated net value. We consider the irrelevance of personal taxes on interest received by debtholders on the value of TS earned by the firm on interest paid. We conclude that Miller’s approach might be wrong and has some inconsistencies.     

Local Taxes and Capital Structure Choice

This paper investigates the question of taxation and capital structure choice in Germany. Germany represents an excellent case study for investigating the question of whether and to what extent taxes influence the debt-equity decision of firms, because the relative tax burdens on debt and equity vary greatly across communities. German communities levy local taxes on profits and long-term debt payments in addition to personal and corporate taxes on the federal level. A stylized model is presented incorporating these taxes. The model shows that local taxes create substantial incentives for firms to use debt financing. Furthermore, the paper empirically investigates the effect of local business taxes on the share of debt used to finance incremental investments by German firms. I find that local taxes significantly influence the capital structure choice of firms, controlling for a large number of other factors. In an extensive sensitivity analysis the tax effect are found to be robust across several different specifications.     

Bank Taxes,Leverage, and Risk

We use staggered changes in the taxation of banks by U.S. states to show how banks adjust their capital structure in response to taxes. A one percentage point increase in the income tax rate leads to a decrease in the ratio of equity to total assets of 15 basis points. The effect is symmetric for tax increases and decreases but heterogeneous in that small and strongly capitalized banks react more. In response to taxes, banks also adjust their assets consistent with regulatory arbitrage activities intended to keep down regulatory risk measures, thereby keeping regulatory ratios at acceptable levels despite increasing leverage. Finally, higher taxes may decrease banks’ ability to survive crises.     

The cost of capital and optimal financing policy in a dynamic setting

This paper revisits the Modigliani–Miller propositions on the optimal financing policy and cost of capital in a dynamic setting. In an environment without taxes and bankruptcy costs, the results are generally consistent with the Modigliani–Miller Propositions 1 and 2. However, the first proposition should be presented and interpreted more carefully, as given firm characteristics, there is only one optimal capital structure. Thus, a firm’s capital structure is relevant. A relaxation of assumptions about either taxes or bankruptcy costs leads to conclusions that are generally different from those in Modigliani and Miller (1958). The model predicts that leverage and sales-to-capital ratios decrease but firm size and capital stock increase with the subjective discount factor of the firm’s manager if there are taxes and bankruptcy costs. The empirical analysis supports these predictions.     

The Effect of Taxes and Depreciation on Corporate Investment and Financial Leverage

This paper provides an analysis of the effect of corporate and personal taxes on the firm's optimal investment and financing decisions under uncertainty. It extends the DeAngelo and Masulis capital structure model by endogenizing the firm's investment decision. The authors' results indicate that, when investment is allowed to adjust optimally, the existing predictions about the relationship between investment-related and debt-related tax shields must be modified. In particular, the authors show that increases in investment-related tax shields due to changes in the corporate tax code are not necessarily associated with reductions in leverage at the individual firm level. In cross-sectional analysis, firms with higher investment-related tax shields (normalized by expected earnings) need not have lower debt-related tax shields (normalized by expected earnings) unless all firms utilize the same production technology. Differences in production technologies across firms may thus explain why the empirical results of recent cross-sectional studies have not conformed to the predictions of DeAngelo and Masulis.     

Globalisation,taxation and inequality

Today's tax systems, in which value-added taxes and payroll taxes play a prominent role, are largely creations of the 1950s. We need to invent modern tax systems adapted to the reality of the 21^st century: the growing importance of capital and the rise of inequality. This article reviews some of the challenges involved with increasing the progressivity of tax systems in a globalised world and discusses how these challenges could be overcome. I make the case for new and more ambitious forms of international cooperation and for modern forms of wealth taxation.     

Personal Taxation in Firm Market Valuation: Theory and Test*

In this paper, I extend Ohlson's 1995 firm market valuation model to incorporate personal taxes: the taxes on dividends and the taxes on capital gains. Without personal taxes, firm market value can be expressed as the present value of future benefits received by the shareholders (dividends, in this case). With personal taxes, the benefits received by the shareholders should be classified into three categories (due to their different tax treatments): dividends, share repurchases, and new share issues (i.e., contributed capital). The extended model shows the effects of personal taxation on firm market valuation: retained earnings are valued less than contributed stocks, both dividends taxes and capital gains taxes affect retained earnings valuation and firm market value, and firms choose cash distribution methods (paying dividends and repurchasing shares) to increase their retained earnings valuation, therefore increasing their market value. An empirical test using a sample from the Disclosure Select Canada and Financial Post Card data bases for the years 1995‐98 supports these personal tax effects.     

DIVIDEND POLICY AND CAPITAL STRUCTURE UNDER THE IMPUTATION TAX SYSTEM: SOME CLARIFYING COMMENTS

This paper analyses the effects of the imputation and capital gains taxes on the dividend and financing decisions of Australian companies. We develop a framework, consistent with Miller's [1977] approach, in which interactions between dividend and financing decisions can be explored. The significance of these interactions depends on both corporate dividend policy and on the relationship between personal and corporate income tax rates. We conclude that under imputation, dividend decisions are more important relative to capital structure decisions, than under the classical tax system.     

Public—Private Partnerships in Ireland: Policy and Practice

Ireland's National Development Plan 2000–2006 includes a significant programme of public—private partnerships (PPPs). The Irish Government's policy on PPPs has been shaped to ensure that capital investments under PPP are not included when calculating key fiscal aggregates. This article traces the origins of Ireland's PPP programme and outlines the extent of PPP activity to date. It details how the PPP programme has failed to make an impact in terms of addressing Ireland's infrastructure deficit and examines three particular cases where the PPP model has been applied.     

Tax reform, the informal economy, and bank financing of capital formation

This paper develops a model that relates businesses’ entry into the underground economy to tax rates and the need to access the banking system. The model uses a dynamic approach in which both firms and banks optimize and in which the benefits to a firm of accessing the banking system are endogenous. A firm compares the return to capital with the marginal tax rate on capital income and uses the difference to determine how much of the tax to pay. At the same time, banks use a firm’s capital tax payments, combined with the capital tax rate to obtain an estimate of the firm’s minimum capital value. If the firm pays at least some taxes then it will have access to the banking system, which will allow it to finance investment. If the firm pays no taxes, then it cannot access the banks and cannot invest. We compare the equilibria resulting from tax compliance and tax evasion. We calibrate the model to a highly stylized version of the Russian economy, and analyze the effect of potential tax changes on the underground economy. We compute a dynamic equilibrium for our model, and note that it tracks the path of certain macroeconomic variables of the Russian economy (GDP, budget and trade balances, price level and interest rate) with some accuracy for the years 2001–2008. We are unable to track the underground economy, as this data is unobservable. We then carry out a series of counterfactual simulations, first asking if non-capital intensive firms have an incentive to evade taxes under existing value added tax rates. We find that they do, and that the incentive would have been greatly reduced if the value added tax rate had been selectively reduced for the non-capital intensive sectors. We then ask what the effect would be if the corporate tax rate were raised on capital intensive sectors. The simulations indicate that the capital intensive sectors would not increase their entry into the underground economy.     

Taxes and capital structure: evidence from firms' response to the Tax Reform Act of 1986

While the theoretical relation between taxes and capital structurehas been extensively analyzed, the empirical evidence on thisissue has thus far been inconclusive. One of the main difficultiesconfronting previous empirical studies of the cross-sectionalrelationship between taxes and leverage was the control of interveningvariables. The Tax Reform Act of 1986 (TRA), which drasticallychanged the tax regime, provides a unique opportunity to assessthe interaction between taxes and leverage decisions in a controlledenvironment. We test the relationship between leverage and certaintax-related variables for a large sample of companies in theyears surrounding the enactment of the TRA. The results supportthe tax-based theories of capital structure. The findings indicatethat there exists a substitution effect between debt and nondebttax shields, and that both corporate and personal tax ratesaffect leverage decisions.     

Investment opportunities and share repurchases

We examine the over-investment motivation for share repurchases using a sample of 139 Real Estate Investment Trusts (REITs) between 1996 and 2010. By combining a REIT's property portfolio data with project ROAs from the underlying real estate market, we are able to create a unique measure of the firm's investment opportunity set. Controlling for other possible buyback rationales, we find that poor investment opportunities are related to higher levels of share repurchases. Conditioning on investment opportunities, we find that the level of cash is positively related to repurchases only for low investment opportunity set firms. We also find a negative relationship between share repurchase announcement returns and investment opportunities.     

我国传媒上市企业资本结构与公司绩效关系的实证研究

资本市场的大幅膨胀,传媒企业竞相上市,中国传媒行业掀起一波融资热潮。以我国的传媒行业2007～2009年数据为研究样本对我国传媒上市企业资本结构与公司绩效关系进行实证研究,结果表明,我国传媒业的资本结构与企业绩效之间存在负相关关系,此外,模型中加入的控制变量中股权集中度、公司成长性、资产流动性以及股权流动性与资本结构存在显著的线性相关性。     

Solutions to Silos: Joining Up Knowledge

Italy's health service—the Servizio Sanitario Nazionale (SSN)—has developed Europe's second largest market for healthcare public–private partnerships. This article describes the origins of private finance for SSN infrastructure, examines the programme's scale and key characteristics, and provides a capital budgeting analysis of rates of return on 14 privately financed schemes. Excess returns are being made by the investors in these projects, and there is potential for SSN procurers to achieve significantly better value for money for the Italian people than has been the case to date.