Premium
Securityholder Taxes, Corporate Capital Structures and the Priority Structure of Debt
Author(s) -
Kim ChangSoo,
Mauer David C.
Publication year - 1997
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1997.tb00441.x
Subject(s) - capital structure , leverage (statistics) , debt , seniority , internal debt , debt ratio , senior debt , recourse debt , monetary economics , debt levels and flows , business , weighted average cost of capital , incentive , debt to gdp ratio , economics , microeconomics , finance , computer science , financial capital , capital formation , engineering , profit (economics) , machine learning , aerospace engineering
This paper shows that the firm has an incentive to issue multiple classes of debt that are differentiated by seniority to enhance securityholder tax‐timing option values. The analysis establishes that there is at least one mix of senior and junior debt that maximizes the tax option gain from having multiple priority classes of debt. An analytic example provides specifications for the optimal amount of leverage and the optimal mix of senior and junior debt. Relative to the case of only one class of debt, a multiple debt priority structure increases the optimal amount of corporate leverage.