Corporate Taxation and Financial Strategies Under Asymmetric Information

28 Pages Posted: 21 May 2014

See all articles by Francesco Cohen

Francesco Cohen

University of Brescia - Department of Economics

Alessandro Fedele

Free University of Bozen-Bolzano - Faculty of Economics and Management

Paolo M. Panteghini

Department of Economics and Management; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: April 21, 2014

Abstract

In this article we study the corporate tax effects on credit market equilibria. In particular, we develop a model that accounts for five pieces of evidence: i) the existence of a tax incentive to borrow, ii) the negative relationship between leverage and profitability, iii) the existence of asymmetric information in credit markets, iv) the screening activity of lenders and v) the business cycle effects on the spread between the high-yield and the investment-grade interest rates on corporate loans. Assuming the existence of two types of firms, we show that either a separating or a pooling credit market equilibrium can arise. More importantly, the equilibrium is crucially affected by corporate taxation. Given these results, we also provide a welfare analysis and discuss corporate tax policy implications.

Keywords: capital structure, corporate taxation, asymmetric information

JEL Classification: H200, D820

Suggested Citation

Cohen, Francesco and Fedele, Alessandro and Panteghini, Paolo M., Corporate Taxation and Financial Strategies Under Asymmetric Information (April 21, 2014). CESifo Working Paper Series No. 4772, Available at SSRN: https://ssrn.com/abstract=2439610

Francesco Cohen

University of Brescia - Department of Economics ( email )

Via San Faustino 74B
Brescia, 25122
Italy

Alessandro Fedele

Free University of Bozen-Bolzano - Faculty of Economics and Management ( email )

Via Sernesi 1
39100 Bozen-Bolzano (BZ), Bozen 39100
Italy

Paolo M. Panteghini (Contact Author)

Department of Economics and Management ( email )

Contrada Santa Chiara 50
BRESCIA, BS 25122
Italy

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

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