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How much of the corporate bond spread is due to personal taxes? |
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| Authors: | Sheen Liu Jian Shi Junbo Wang Chunchi Wu |
| Affiliation: | 1. Faculty of Finance,Washington State University, Vancouver,WA, 98686, USA;2. College of Business Administration, University of Texas at Arlington, Arlington, TX 76019, USA;3. Faculty of Business, City University of Hong Kong, Kowloon, Hong Kong SAR;4. Lee Kong Chian School of Business, Singapore Management University, Singapore 178899, Singapore;5. College of Business, University of Missouri, Columbia, MO 65211, USA |
| Abstract: | Existing term structure models of defaultable bonds have often underestimated corporate bond spreads. A potential problem is that investors’ taxes are ignored in these models. We propose a pricing model that accounts for stochastic default probability and differential tax treatments for discount and premium bonds. By estimating parameters directly from bond data, we obtain significantly positive estimates for the income tax rate of a marginal corporate bond investor after 1986. This contrasts sharply with the previous finding that the implied tax rates for Treasury bonds are close to zero. Results show that taxes explain a substantial portion of corporate bond spreads. |
| Keywords: | G0 G12 |
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