Premium
Debt Management under Corporate and Personal Taxation
Author(s) -
MAUER DAVID C.,
LEWELLEN WILBUR G.
Publication year - 1987
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1987.tb04366.x
Subject(s) - coupon , capital structure , monetary economics , leverage (statistics) , debt , tax shield , equity value , shareholder , business , equity (law) , economics , corporate tax , internal debt , double taxation , finance , tax avoidance , debt levels and flows , tax reform , state income tax , gross income , public economics , corporate governance , machine learning , computer science , political science , law
The presence of long‐term debt in a corporation's capital structure is shown to give rise to a valuable tax‐timing option that can be exercised by the firm on behalf of its shareholders. This option, which is not available if the firm is fully equity financed, implies that leverage will have a positive tax effect on total firm value even if there is no such effect associated with the tax deductibility of the coupon interest payments on debt. The more volatile interest rates and bond prices are, the more valuable the tax‐timing option and the larger the favorable impact of debt on shareholder wealth.