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Tax Benefits of Debt and Debt Financing in Korea *
Author(s) -
Ko Jong Kwon,
Yoon SungSoo
Publication year - 2011
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/j.2041-6156.2011.01059.x
Subject(s) - leverage (statistics) , monetary economics , debt financing , debt , business , financial crisis , economics , value added tax , financial system , finance , public economics , macroeconomics , machine learning , computer science
In this study, we attempt to determine whether or not Korean firms have failed to fully utilize the tax benefits of debt, particularly in the aftermath of the 1997 Asian financial crisis. Results suggest that underleveraged firms lost significant tax savings that would have been available had they increased debt levels to their kink. The incremental tax benefit in 2008 is estimated to be as large as 5.2% (2.1%) of firm value prior to (after) the personal tax penalty. These firms’ low leverage, however, seems reasonable when we consider the financial distress costs. Increases in expected default costs offset the majority of potential tax savings after the financial crisis.