Abstract

http://ssrn.com/abstract=2023645
 
 

References (53)



 
 

Citations (1)



 


 



Debt and Creative Destruction: Why Could Subsidizing Corporate Debt Be Optimal?


Zhiguo He


University of Chicago - Booth School of Business, and NBER

Gregor Matvos


University of Chicago - Booth School of Business

July 1, 2013

Fama-Miller Working Paper
AFA 2013 San Diego Meetings Paper
Chicago Booth Research Paper No. 12-34

Abstract:     
We illustrate the welfare benefit of tax subsidies to corporate debt financing and study how the social cost/benefit trade-off of the subsidy changes with the duration of industry distress. To illustrate the benefit, we model two firms, which engage in a socially wasteful competition for survival in a declining industry. Firms differ on two dimensions: exogenous productivity and endogenously chosen amount of debt financing, resulting in a two dimensional war of attrition. Debt financing increases incentives to exit, which, while costly for the firm, is socially beneficial. These benefits decline as industry distress shortens, and the planner trades them off with increased costs of subsidizing corporate debt from the existing literature. In practice, debt payments are only subsidized for profitable firms — this implementation arises naturally in our normative model, even though the goal of the policy is to entice low productivity firms to take on debt.

Number of Pages in PDF File: 45

working papers series


Download This Paper

Date posted: March 17, 2012 ; Last revised: February 13, 2014

Suggested Citation

He, Zhiguo and Matvos, Gregor, Debt and Creative Destruction: Why Could Subsidizing Corporate Debt Be Optimal? (July 1, 2013). Fama-Miller Working Paper; AFA 2013 San Diego Meetings Paper; Chicago Booth Research Paper No. 12-34. Available at SSRN: http://ssrn.com/abstract=2023645 or http://dx.doi.org/10.2139/ssrn.2023645

Contact Information

Zhiguo He (Contact Author)
University of Chicago - Booth School of Business, and NBER ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
HOME PAGE: http://faculty.chicagobooth.edu/zhiguo.he/pubs.html

Chicago Booth School of Business Logo

Gregor Matvos
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
Feedback to SSRN


Paper statistics
Abstract Views: 930
Downloads: 165
Download Rank: 101,820
References:  53
Citations:  1

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo1 in 0.328 seconds