How Big ar the Tax Benefits of Debt?
JOHN R. GRAHAM* ABSTRACT
I integrate chthonic self-coloured-specific benefit functions to estimate that the capitalized revenue benefit of debt equals 9.7 percent of firm value ~or as first as 4.3 percent, exonerate of personal taxes!. The typical firm could double tax benefits by issuing debt until the marginal tax benefit begins to decline. I hazard how aggressively a firm uses debt by observing the order of its tax benefit function. Paradoxically, large, liquid, profitable firms with low expected trauma costs use debt conservatively. Product market factors, growth options, low asset collateral, and planning for future expenditures lead to conservative debt usage. conservativist debt policy is persistent.
DO THE TAX BENEF ITS of debt affect bodily pay decisions? How much do they add to firm value? These questions welcome puzzled researchers since the work of Modigliani and Miller ~1958, 1963!. Recent evidence indicates that tax benefits are one of the factors that affect financing choice ~e.g., MacKie-Mason ~1990!, whole meal flour ~1996a!!, although opinion is not unanimous on which factors are more or less important or how they contribute to firm value ~Shyam-Sunder and Myers ~1998!, Fama and French ~1998!!.
Researchers face several problems when they investigate how tax incentives affect corporate financial policy and firm value. Chief among these problems is the difficulty of reckon corporate tax rates due to data problems and the complexity of the tax code. Other challenges include quantifying the effects of interest taxation at the personal level and understanding the bankruptcy do by and the attendant costs of financial distress. In this
* Graham is at the Fuqua School of Business, Duke University. Early conversations with Rick Green, Eric Hughson, Mike Lemmon, and S. P. Kothari were helpful in formulating some of the ideas in this paper. I thank Peter circumstance for providing the bond...If you want to get a full essay, order it on our website: Orderessay
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