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 effect of taxes on multinational debt location

We provide new evidence that differences in international tax rates and tax regimes affect multinational firms' debt location decisions. Our sample contains 8287 debt issues from 2437 firms headquartered in 23 different countries with debt-issuing subsidiaries in 59 countries. We analyze firms' marginal decisions of where to issue debt to investigate the influence of a comprehensive set of tax-related effects, including differences in personal and corporate tax rates, tax credit and exemption systems, and bi-lateral cross-country withholding taxes on interest and dividend payments. Our results show that differences in personal and corporate tax rates, the presence of dividend imputation or relief tax systems, the tax treatment of repatriated profits, and inter-country withholding taxes on dividends and interest significantly influence the decision of where to locate debt and the proportion of debt located abroad. Our results are robust to firm and issue specific factors and to the effect of legal regimes, debt market development, and exchange rate risk.     

Tax Reform and the Demand for Debt

This article examines the impact on household borrowing from a tax reform that implied a change from progressive to constant marginal tax rates on interest deductions. We use three alternative empirical methods to address the problem of endogenous explanatory variables, which arises when the marginal tax rate itself is a function of the amount of debt: The first approach uses instrumental variables to examine the significance of the marginal tax rate directly and produces mixed results. In the second approach we use tobit regressions based on repeated cross-sectional data to examine the correspondence between debt and income and find that the households' amount of debt were strongly and positively related to income before the tax reform and significantly more income-dependent under progressive tax rates than under the constant tax rate. Finally, using panel data covering the last year prior to the reform and the first year after, we find that the change in a household's marginal tax rate had a significant impact on the change in its amount of debt.     

Adapting the APV valuation methodology and the beta gearing formula to the dividend imputation tax system

This paper adapts the APV valuation methodology and the formula for gearing beta to the Australian dividend imputation tax system. The APV formulation is shown to be able to be applied in the dividend imputation tax system by simply replacing the statutory tax rate with an effective tax rate in the calculation of the “cash flows”. The effect of the dividend imputation tax system on a company's value is shown to be easily bounded using the APV formulation by making the extreme assumption that imputation credits are either: fully distributed and fully valued by the market; or that they are worthless. This paper also quantifies the effect of changing the assumed value of imputation credits on: (i) the value of the interest tax shield of debt; and (ii) the levered, or equity, beta.     

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%.     

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.     

EVIDENCE ON THE ROLE OF TAXES ON FINANCING CHOICE: CONSIDERATION OF MANDATORILY REDEEMABLE PREFERRED STOCK

In this study we examine the effect of firms' marginal tax rates on incremental and overall reliance on mandatorily redeemable preferred stock (MRPS). Similarities in the cash flows associated with debt and MRPS, as well as similarities in the claims of holders of debt and MRPS on the assets of issuing firms, suggest that MRPS may be viewed as a substitute for debt. However, important differences in the tax treatment of MRPS and debt suggest that firms that cannot make full use of interest tax shields may be able to finance more efficiently using MRPS instead of debt. The results indicate that, both incrementally and overall, firms with low marginal tax rates rely more heavily on MRPS than debt relative to firms with high tax rates. This finding is consistent with the proposition that firms that cannot make full use of interest tax shields finance incrementally using equity rather than debt.     

On the Relevance of Debt Maturity Structure

In this paper, we present a tax-induced framework to analyze debt maturity problems. We show that under some modifications of the existing U.S. tax code, debt maturity is irrelevant even in the presence of taxes and bankruptcy costs that yield an optimal capital structure. If this restrictive structure is relaxed, and assuming the Miller [15] equilibrium does not prevail, tax reasons would usually imply the existence of an optimal debt maturity structure. If there exists a gain from leverage, then an increasing term structure of interest rates, adjusted for default risk, results in long-term debt being optimal. A decreasing term structure, under similar circumstances, renders short-term debt optimal. In the absence of agency costs, a Miller [15]-type result emerges at equilibrium and irrelevance prevails. We also argue that agency costs could again reverse the irrelevance and imply a firm-specific optimal debt maturity structure.     

Establishing bounds on the tax advantage to debt

The partial dismantling of the imputation tax system that commenced in July 1997 once more opens the discussion on the relative tax advantage to debt and its impact on the cost of capital. In this paper we examine the implications of these recent changes for the value of the tax advantage to debt. We analyse the value of debt-related tax shields by computing the individual tax liabilities of 1268 quoted companies that reported during the period 1980–2000 taking account of any tax exhaustion or surplus ACT. We use these estimates to establish an upper bound on the tax advantage to debt. We conclude that even following the 1997 changes in the imputation tax system the probable value for the average current tax advantage to debt in the UK at present is at most about 13% of the value of debt.     

EVIDENCE ON THE EFFECT OF TAXES ON FIRMS' DECISIONS TO RETIRE DEBT EARLY

We examine the effect of marginal tax rates on the decision to retire debt early. Other factors that have been linked to the debt retirement decision are also investigated, including leverage adjustment and the value associated with the immediate recognition of a loss for tax purposes on early retirement. Results indicate that firms that retire debt early have lower marginal tax rates than firms that do not retire debt early. This finding is consistent with the proposition that firms are motivated to retire debt early by an incentive to reduce tax shields that cannot be used efficiently. Further, firms that retire debt early are more highly leveraged than firms that do not retire debt early. Evidence also suggests that some firms retire debt early at a loss to reduce currently taxable income.     

Does Brazilian allowance for corporate equity reduce the debt bias? Evidences of rebound effect and ownership-induced ACE clientele

We analyse if the Brazilian Allowance for Corporate Equity (ACE-type system) reduces the debt tax bias. Specifically, we study if the continuous treatment effect of interest on equity negatively affects the level of financial leverage. We find that the tax policy implemented is similar to the deductible cash dividends and not to an ACE. The empirical implication is that the interest on equity treatment increases the debt tax bias, producing a rebound effect to what is expected for this policy on the risk-taking behaviour and corporate capital structure. This rebound effect is homogeneous in firms with different financial constraints status. There are evidences that shareholders influence the cash distribution policy, adjusting the later to their own tax preferences. Therefore, there may be an “ACE clientele effect” induced by heterogeneity in tax preferences among shareholders.     

Debt, Leases, Taxes, and the Endogeneity of Corporate Tax Status

We provide evidence that corporate tax status is endogenous to financing decisions, which induces a spurious relation between measures of financial policy and many commonly used tax proxies. Using a forward-looking estimate of before-financing corporate marginal tax rates, we document a negative relation between operating leases and tax rates, and a positive relation between debt levels and tax rates. This is the first unambiguous evidence supporting the hypothesis that low tax rate firms lease more, and have lower debt levels, than high tax rate firms.     

Do Taxes Affect Corporate Financing Decisions?

This paper provides clear evidence of substantial tax effects on the choice between issuing debt or equity; most studies fail to find significant effects. The relationship between tax shields and debt policy is clarified. Other papers miss the fact that most tax shields have a negligible effect on the marginal tax rate for most firms. New predictions are strongly supported by an empirical analysis; the method is to study incremental financing decisions using discrete choice analysis. Previous researchers examined debt/equity ratios, but tests based on incremental decisions should have greater power.     

财政限制下政府债务与通货膨胀研究

随着人口老龄化,许多发达经济体都步入了财政压力时代,政府对养老金的承诺大大高于财政收入,政府为了实现承诺将利用发行新债务进行融资,这将带来未来的高税收预期.随着债务水平和税率水平的上升,人们对税收的容忍度将下降,从而触碰财政限制的可能性增大.在采取固定税率情况下,调整税收不再能稳定债务,必须采取政策转变来应对.在财政限制之前债务增长与政策调节如何相互作用,若采用货币政策的被动调节来满足稳定债务,那么政府债务将影响到通货膨胀,从而使货币政策失去对通货膨胀的控制,进而需要通过财政政策来解决通胀问题.     

Beta Geared and Ungeared: Further Analysis of the Case of Active Debt Management

This paper extends previous work by Appleyard and Strong (1989) concerned with the implications of an active debt management policy (ADMP) for de-gearing a geared firm's equity beta. First, alternative derivations of the ADMP beta de-gearing formulae for an MM perfect capital market with corporation tax and for a world with corporation and personal taxes are presented. These derivations do not require the assumption of level perpetuity expected cash flows and therefore indicate a broader basis for the ADMP beta de-gearing formulae than previously demonstrated. Secondly, possible investor valuation errors from use of a PDMP (passive debt management policy) valuation methodology to value firms pursuing an ADMP are analysed in the context of an MM perfect capital market with corporation tax. Given constant (or zero) growth in the firm's expected unlevered cash flows, this analysis indicates that degearing errors from use of the PDMP beta de-gearing formula will only be associated with valuation errors if there is a change in the firm's target debt ratio and that the significance of such valuation errors will be largely dependent on the expected growth rate.     

On the value and determinants of the interest tax shields

We use a dynamic model of the firm to ascertain both the value and the determinants of the debt tax shields. For a representative U.S. firm, we find that the value of the interest tax shields represents less than 5 % of firm value, and it varies considerably across U.S. industries. Our results also show that this component of firm value behaves counter-cyclically over the business cycle. Finally, besides the interest rate on debt and the corporate income tax rate, we find that the curvature of the production function is one of the main determinants of the tax advantage of debt.     

国债税收平滑路径、我国国债与税收关系背景和取向分析

本分析了税收平滑在我国的适用情况，通过我国国债和税收政策的演变和背景，我们认为税收平滑在我国一直没有存在的可能性，因此，当期不能简单地将国债增发和减税作为积极财政政策的两个互为补充手段。我国税收征收空间分析应侧重税收经济效应自身，财政税收政策的调整可平稳过渡为国债税收平滑路径的建立做准备。     

地方竞争是否阻碍了地方政府债务绩效的提升？——理论框架及空间计量研究

本文从举债行为策略视角考察地方竞争对地方政府债务绩效的影响。 首先,从不同地区间举债行为策略互动的视角对地方竞争如何影响地方政府债务绩效进行理论诠释,其次,在采用Global超效率DEA方法测度地方政府债务绩效的基础上,突破空间独立性假设,运用空间杜宾模型对地方竞争影响地方政府债务绩效的效果及空间外溢性进行实证检验。研究发现,在地方效用最大化目标导向下,无论是地方税收竞争还是公共投资竞争,都对债务增速产生了较为显著的正向影响和空间外溢效应,导致地方采取主动扩大债务规模的举债行为策略。与此同时,随着债务规模的持续增长,无论是地方税收竞争还是公共投资竞争,都将对债务绩效产生“规模报酬递减”的负向影响和空间外溢效应,尤其是公共投资竞争的影响效果更加明显。进一步地,如果考虑到可能存在预算软约束现象,地方竞争还将与预算软约束行为相结合,对债务绩效产生了“使用效率递减”的负向影响。本文结论为通过债务合理使用来促进经济高质量发展,防范化解地方政府债务风险提供了政策启示。     

How Big is the Tax Advantage to Debt?

This paper uses an option valuation model of the firm to answer the question, “What magnitude tax advantage to debt is consistent with the range of observed corporate debt ratios?” We incorporate into the model differential personal tax rates on capital gains and ordinary income. We conclude that variations in the magnitude of bankruptcy costs across firms can not by itself account for the simultaneous existence of levered and unlevered firms. When it is possible for the value of the underlying assets to jump discretely to zero, differences across firms in the probability of this jump can account for the simultaneous existence of levered and unlevered firms. Moreover, if the tax advantage to debt is small, the annual rate of return advantage offered by optimal leverage may be so small as to make the firm indifferent about debt policy over a wide range of debt-to-firm value ratios.     

Have the tax benefits of debt been overestimated?

We re-examine the claim that many corporations are underleveraged in that they fail to take full advantage of debt tax shields. We show prior results suggesting underleverage stems from biased estimates of tax benefits from interest deductions. We develop improved estimates of marginal tax rates using a non-parametric procedure that produces more accurate estimates of the distribution of future taxable income. We show that additional debt would provide firms with much smaller tax benefits than previously thought, and when expected distress costs and difficult-to-measure non-debt tax shields are also considered, it appears plausible that most firms have tax-efficient capital structures.