Corporate taxes, strategic default, and the cost of debt

Ali Nejadmalayeri, Manohar Singh

Research output: Contribution to journalArticle

8 Scopus citations

Abstract

The current US tax code's loss carry provisions provide implicit tax subsidies to financially troubled firms. Since shareholders ultimately decide when to announce bankruptcy, such tax subsidies can incentivize them to strategically postpone default. Therefore, corporate taxation can influence corporate cost of debt. Using a large panel of corporate bonds, we find supporting evidence: credit spreads become smaller as tax loss carries grow larger. In contrast, tax shields such as depreciation, which limit loss carry gains, lead to wider spreads. Interestingly, when stockholders hold greater bargaining power - due to large managerial ownership - larger corporate tax shields lead to even narrower credit spreads.

Original languageEnglish (US)
Pages (from-to)2900-2916
Number of pages17
JournalJournal of Banking and Finance
Volume36
Issue number11
DOIs
StatePublished - Nov 1 2012

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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