Taxes,unequal access,public debt and corporate financial policy in the United Kingdom

The effect of corporate and personal taxes on the capital structure of the firm has been a subject of intense research in finance over several decades. However, specific features of tax systems are often overlooked in order to retain analytical tractability. The exclusion of public debt is another simplifying feature used in the modelling of the capital structure problem. In this paper we present a general equilibrium analysis of capital structure theory incorporating the impacts of the specific tax features of Government debt and financial intermediation in the United Kingdom. The implications of our model are shown to be consistent with the recent situation in the United Kingdom. That is, companies were not borrowing via the corporate debenture market; corporate borrowing was effected by the medium of bank loans.     

Determinants of corporate borrowing

Many corporate assets, particularly growth opportunities, can be viewed as call options. The value of such ‘real options’ depends on discretionary future investment by the firm. Issuing risky debt reduces the present market value of a firm holding real options by inducing a suboptimal investment strategy or by forcing the firm and its creditors to bear the costs of avoiding the suboptimal strategy. The paper predicts that corporate borrowing is inversely related to the proportion of market value accounted for by real options. It also rationalizes other aspects of corporate borrowing behavior, for example the practice of matching maturities of assets and debt liabilities.     

Reformulating Tax Shield Valuation: A Note

Standard financial theory (in the absence of agency costs and personal taxes) implies that each dollar of debt contributes to the value of the firm in proportion to the firm's tax rate. To derive this result, incremental debt is assumed permanent. This paper shows that when the firm acts to maintain a constant market value leverage ratio, the marginal value of debt financing is much lower than the corporate tax rate. Since Hamada's 2 unlevering procedure for observed equity betas was derived under the assumption of permanent debt, we derive an unlevering procedure consistent with the assumption of a constant leverage ratio.     

The Determinants of Debt Maturity Structure: Evidence from France,Germany and the UK

We examine the determinants of the debt maturity structure of French, German and British firms. These countries represent different financial and legal traditions that may have implications on corporate debt maturity structure. Our model incorporates the factors representing three major theories (tax considerations, liquidity and signalling, and contracting costs) of debt maturity. It also controls for capital market conditions. The results confirm the applicability of most theories of debt maturity structure for the UK firms. However, the evidence from France and Germany are mixed. Overall the findings suggest that the debt maturity structure of a firm is determined by firm‐specific factors and the country's financial systems and institutional traditions in which it operates.     

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.     

Taxes,Inflation and Corporate Financial Policy

This paper examines inflation-induced distortions in personal and corporate income taxes and discusses the implications for corporate dividend and financial structure policies and for shareholder unanimity. The tax effects relating to capital gains and debt interest cause changes in aggregate corporate borrowing and lead to equilibrium tax relationships which differ from the zero-inflation tax relationships.     

担保物权制度改革降低了企业债务融资成本吗?——来自中国《物权法》自然实验的经验证据

本文运用双重差分法考察以《物权法》出台为标志的担保物权制度改革是否降低了企业的债务成本。实证结果显示,《物权法》出台后,与固定资产占比较高的企业相比,固定资产占比较低企业的债务成本显著降低。进一步,与《物权法》出台通过扩大可抵押资产范围、加强债权人保护等渠道降低企业债务成本的经济直觉一致,三重差分检验结果表明,担保物权制度改革对企业债务成本的降低作用表现出丰富差异性:其一,与法律制度环境较好地区相比,《物权法》对企业债务成本的降低作用在法律制度环境较差地区相对更大;其二,与金融市场化程度较高地区相比,《物权法》对企业债务成本的降低作用在金融市场化程度较低地区相对更大;其三,与融资约束较弱企业相比,对于融资约束较强的企业而言,《物权法》对债务成本的降低作用相对更强。这些基于中国经济实践的经验证据识别并揭示出了担保物权制度改革促使企业债务成本下降的作用机理,从而对有效缓解企业融资难、融资贵等问题具有借鉴意义。     

THE IMPACT OF FINANCING SOURCES ON MULTINATIONAL PROJECTS

It is shown here that market imperfections, such as corporate taxes, are not a necessary condition for a firm to have a debt denomination preference. When the stochastic nature of project cash flows and exchange rates are explicitly considered, the risk of the project is affected by the source of borrowing used to finance the project. It is also shown that the existence of income taxes causes the expected net present value and risk of a foreign project to depend on the source of the firm's borrowing. The debt denomination preference in both cases depends on project- and country-specific variables.     

Callable Bonds: A Risk-Reducing Signalling Mechanism

The theory of financial economics has failed to distinguish advantages of callable bonds from those of short-term debt. This paper shows that either type of borrowing can signal a firm's better prospects but that short-term debt does so at the cost of weakened risk-sharing with capital markets. By issuing either equity or long-term, non-callable debt, a firm with poor investment opportunities will not pool its prospects with those of a better firm. But equity produces superior risk-sharing. Perhaps this explains the almost complete absence of long-term, non-callable bonds from observed corporate capital structures.     

Financial leverage clienteles: Theory and evidence

This paper examines the hypothesis that investors will sort themselves out into tax-induced ‘financial leverage clienteless’ in which the common stocks of highly levered firms will be held by individuals with low personal tax rates, while the shares of firms with little or no leverage will be held by individuals with high personal tax rates. Although the idea of financial leverage clienteless has appeared in the literature before, the immediate motivation for this investigation is a recent paper by Merton Miller. In that paper he argues that under the current U.S. tax structure, personal taxes will offset corporate taxes such that in equilibrium the value of any individual firm will be independent of its use of debt financing. We extend his analysis to show specifically the way in which financial leverage clienteles would come about in his assumed tax environment. We then conduct some direct empirical tests of the leverage clientele hypothesis. These tests can also be viewed as indirect tests of Miller's new proposition on the irrelevance of capital structures. The results of the tests are mixed: The relationship between corporate leverage policies and investors' tax rates is statistically significant, but its magnitude is less than would be predicted by the theory.     

Resaleable debt and systemic risk

Many debt claims, such as bonds, are resaleable; others, such as repos, are not. There was a fivefold increase in repo borrowing before the 2008–2009 financial crisis. Why? Did banks’ dependence on non-resaleable debt precipitate the crisis? In this paper, we develop a model of bank lending with credit frictions. The key feature of the model is that debt claims are heterogenous in their resaleability. We find that decreasing credit market frictions leads to an increase in borrowing via non-resaleable debt. Such borrowing has a dark side: It causes credit chains to form, because, if a bank makes a loan via non-resaleable debt and needs liquidity, it cannot sell the loan but must borrow via a new contract. These credit chains are a source of systemic risk, as one bank’s default harms not only its creditors but also its creditors’ creditors. Overall, our model suggests that reducing credit market frictions may have an adverse effect on the financial system and even lead to the failures of financial institutions.     

Corporate social responsibility and degrees of operating and financial leverage

We examine the relationship between corporate social responsibility (CSR) and firms’ degrees of operating (DOL) and financial leverage (DFL). Combining the enlightened value maximizing and capital structure theories, we hypothesize that CSR as firms’ strategic choice to internalize the cost from implicit contracts between the firms and their non-investing stakeholders affects firms’ operating and financial leverage. We find empirical evidence that CSR and CSR strengths are positively (negatively) related to firms’ DOL (DFL). CSR concerns are positively related firms’ DOL and DFL. We also document that CSR is positively related to firms’ operating cost and we find evidence that CSR acts as a substitute for corporate debt tax shield when firms’ financial leverage is low.     

The Real and Financial Implications of Corporate Hedging

We study the implications of hedging for corporate financing and investment. We do so using an extensive, hand‐collected data set on corporate hedging activities. Hedging can lower the odds of negative realizations, thereby reducing the expected costs of financial distress. In theory, this should ease a firm's access to credit. Using a tax‐based instrumental variable approach, we show that hedgers pay lower interest spreads and are less likely to have capital expenditure restrictions in their loan agreements. These favorable financing terms, in turn, allow hedgers to invest more. Our tests characterize two exact channels—cost of borrowing and investment restrictions—through which hedging affects corporate outcomes. The analysis shows that hedging has a first‐order effect on firm financing and investment, and provides new insights into how hedging affects corporate value. More broadly, our study contributes novel evidence on the real consequences of financial contracting.     

Determinants of the floating-to-fixed rate debt structure of firms

We analyze the effects of managerial incentive, firm characteristics and market timing on floating-to-fixed rate debt structure of firms. We find that chief financial officer's (CFO's), not chief executive officer's (CEO's), incentive has a strong influence on firm's debt structure. When CFOs have incentives to increase (decrease) firm risk, firms obtain volatility-increasing (-decreasing) debt structure. These effects are present only for CFOs who are not subject to high monitoring by board members, CEOs, or corporate control market. Our findings suggest that agency problems at the level of non-CEO executives could be an important driver of various corporate decisions.     

The Value of Financial Flexibility

We develop a model that endogenizes dynamic financing, investment, and cash retention/payout policies in order to analyze the effect of financial flexibility on firm value. We show that the value of financing flexibility depends on the costs of external financing, the level of corporate and personal tax rates that determine the effective cost of holding cash, the firm's growth potential and maturity, and the reversibility of capital. Through simulations, we demonstrate that firms facing financing frictions should simultaneously borrow and lend, and we examine the nature of dynamic debt and liquidity policies and the value associated with corporate liquidity.     

Debt maturity structure of Chinese companies

Numerous studies have focused on the theoretical and empirical aspects of corporate capital structure since the 1960s. As a new branch of capital structure, however, debt maturity structure has not yet received as much attention as the debt-equity choice. We use the existing theories of corporate debt maturity to investigate the potential determinants of debt maturity of the Chinese listed firms. In addition to the traditional estimation methods, the system-GMM technique is used to explicitly control for the endogeneity problem. We find that the size of the firm, asset maturity and liquidity have significant effects in extending the maturity of debt employed by Chinese companies. The amount of collateralized assets and growth opportunities also tend to be important. However, proxies for a firm's quality and effective tax rate apparently report mixed or unexpected results. Debt market and equity market conditions are also examined in relation to corporate loan maturity. The system-GMM results show that market factors seem to influence debt maturity decisions. Finally, corporate equity ownership structure has also been found to have some impact on debt maturity mix.     

Is there a CSI-leverage nexus?

We examine how various measures of consumer sentiment index (CSI) affect firms' debt policy decisions. Using U.S. firm-level quarterly data from 1993 to 2017, we provide a strong positive relationship between CSI measures and corporate debt policy, implying that firms use external borrowing during a positive economic outlook and reap the tax-shield benefit. We also find that improved household optimism over financial and business sentiments leads to future household consumption. The CSI-leverage nexus is moderated by the state of firms' financial condition, reputation, and profitability. Importantly, our results are robust to sub-sample analysis, firm-level and macroeconomic controls, econometric specifications, alternative measures of sentiment including Shiller's cyclically adjusted price-earnings ratio (i.e., CAPE_SH), Baker and Wurgler (2006)’s stock market sentiment index (i.e., SENT_BW) and search-based uncertainty measure such as FEARS (i.e., Financial and Economic Attitudes Revealed by Search) index of Da, Engelberg, and Gao (2015).     

The Priority Structure of Corporate Liabilities

Most discussions of corporate capital structure effectively assume that all debt is the same. Yet debt differs by maturity, covenant restrictions, conversion rights, call provisions, and priority. Here, we examine priority structure across a sample of 4995 COMPUSTAT industrial firms from 1981 to 1991. We analyze the variation in the use of capital leases, secured debt, ordinary debt, subordinated debt, and preferred stock both as a fraction of the firm's market value and as a fraction of total fixed claims. Our evidence provides consistent support for contracting cost hypotheses, mixed support for tax hypotheses, and little support for the signaling hypothesis.     

Corporate Debt Structure and the Financial Crisis

We present a DSGE model where firms optimally choose among alternative instruments of external finance. The model is used to explain the evolving composition of corporate debt during the financial crisis of 2008–09, namely, the observed shift from bank finance to bond finance, at a time when the cost of market debt rose above the cost of bank loans. We show that the flexibility offered by banks on the terms of their loans and firms' ability to substitute among alternative instruments of debt finance are important to shield the economy from adverse real effects of a financial crisis.     

Tax Biases to Debt Finance: Assessing the Problem,Finding Solutions*

Legal, administrative and economic considerations offer no compelling reason for the current tax advantage of debt finance in many countries. Instead, this ‘debt bias’ creates significant inequities, complexities and economic distortions. These are likely to be larger than previously thought, especially in the financial sector. To tackle debt bias, the most promising reform is to introduce an allowance for corporate equity, as some countries have successfully done. Its main obstacle is a budgetary cost, estimated at around 15 per cent of current revenue, on average for a selection of advanced economies. This cost can be reduced by granting the allowance only to new investment. The allowance could also be targeted to the financial sector and financed by special bank levies.