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Tax‐Exempt Debt and the Capital Structure of Nonprofit Organizations: An Application to Hospitals
Author(s) -
WEDIG GERARD J.,
HASSAN MAHMUD,
MORRISEY MICHAEL A.
Publication year - 1996
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.1540-6261.1996.tb04069.x
Subject(s) - debt , business , internal debt , finance , debt financing , constraint (computer aided design) , monetary economics , debt to gdp ratio , investment (military) , debt levels and flows , tax credit , capital structure , cost of capital , senior debt , financial system , economics , incentive , public economics , microeconomics , mechanical engineering , politics , political science , law , engineering
The availability of tax‐exempt financing provides nonprofit (NP) organizations with their own tax‐based incentives to issue debt. In this article, we develop a theoretical model in which NPs gain an indirect arbitrage from tax‐exempt debt issuance, constrained by: 1) the requirement that fixed investment exceed tax‐exempt debt flows (the project financing constraint), and 2) the constraint against share issuance. These constraints cause them to impute tax benefits to projects that afford access to the tax‐exempt bond market. Empirical tests indicate that NP hospitals behave as if they have target levels of tax‐exempt debt. Debt targeting is constrained by the availability of capital projects, while excess debt capacity stimulates investment.