Optimal Capital Structure Under Corporate and Personal Taxation
27 Pages Posted: 4 Oct 2009 Last revised: 12 Oct 2009
Date Written: March 1, 1980
In this paper, a model of corporate leverage choice is formulated in which corporate and differential personal taxes exist and supply side adjustments by firms enter into the determination of equilibrium prices of debt and equity. The presence of corporate tax shield substitutes for debt such as accounting depreciation, depletion allowances, and investment tax credits is shown to imply a market equilibrium in which each firm has a unique interior optimum leverage decision (with or without leverage-related costs). The optimal leverage model yields a number of interesting predictions regarding cross-sectional and time-series properties of firms’ capital structures. Extant evidence bearing on these predictions is examined.
Keywords: Capital Structure, Corporate Taxes, Personal Taxes, Bankruptcy Costs, Non-debt Tax Shields, Leverage
JEL Classification: G32, G33, D21, H25
Suggested Citation: Suggested Citation