Debt and Creative Destruction: Why Could Subsidizing Corporate Debt Be Optimal?
45 Pages Posted: 17 Mar 2012 Last revised: 13 Feb 2014
There are 2 versions of this paper
Debt and Creative Destruction: Why Could Subsidizing Corporate Debt Be Optimal?
Debt and Creative Destruction: Why Could Subsidizing Corporate Debt Be Optimal?
Date Written: July 1, 2013
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.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Within-Industry Timing of Earnings Warnings: Do Managers Herd?
By Senyo Y. Tse and Jenny Wu Tucker
-
Endogenous Information Flows and the Clustering of Announcements
By Viral V. Acharya, Peter M. Demarzo, ...
-
Endogenous Information Flows and the Clustering of Announcements
By Viral V. Acharya, Peter M. Demarzo, ...
-
Endogenous Information Flows and the Clustering of Announcements
By Viral V. Acharya, Peter M. Demarzo, ...
-
Endogenous Information Flows and the Clustering of Announcements
By Viral V. Acharya, Peter M. Demarzo, ...
-
Endogenous Information Flows and the Clustering of Announcements
By Viral V. Acharya, Peter M. Demarzo, ...
-
Strategic Disclosure as an Explanation for Asymmetric Return Volatility
By Jonathan L. Rogers, Catherine M. Schrand, ...
-
Does Beta Move with News? Firm-Specific Information Flows and Learning About Profitability
By Andrew J. Patton and Michela Verardo
-
Herd Behavior in Voluntary Disclosure Decisions: An Examination of Capital Expenditure Forecasts*
By Nerissa C. Brown, Lawrence A. Gordon, ...