Optimal Capital Structure Under Corporate and Personal Taxation

DeAngelo, Harry; Masulis, Ronald W.

Download This Paper

Open PDF in Browser

Add Paper to My Library

Optimal Capital Structure Under Corporate and Personal Taxation

Journal of Financial Economics, Vol. 8, No. 1, pp. 3-27, 1980

27 Pages Posted: 4 Oct 2009 Last revised: 6 Oct 2009

See all articles by Harry DeAngelo

Harry DeAngelo

University of Southern California - Marshall School of Business - Finance and Business Economics Department

University of New South Wales, Sydney; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Date Written: March 1, 1980

Abstract

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

DeAngelo, Harry and Masulis, Ronald W., Optimal Capital Structure Under Corporate and Personal Taxation (March 1, 1980). Journal of Financial Economics, Vol. 8, No. 1, pp. 3-27, 1980, Available at SSRN: https://ssrn.com/abstract=1482270