58 Pages Posted: 30 Oct 2015 Last revised: 5 Jul 2017
Date Written: June 13, 2017
This paper determines the optimal ownership share held by a unit into a second unit, when both face a tax-bankruptcy trade-off. Full ownership is optimal when the first unit has positive debt, because dividends help avoid its default. Positive debt is, in turn, optimal when its corporate tax rate exceeds a threshold; and/or Thin Capitalization Rules place an upper limit on the debt level in the second unit; and/or the Volcker Rule bans bailout transfers to the second unit. Full ownership is no longer optimal only if there is a tax on intercorporate dividend. This theory rationalizes observations on multinationals, financial conglomerates and family groups.
Keywords: ownership, leverage, taxes, Thin Capitalization, groups, multinationals
JEL Classification: G32, H32
Suggested Citation: Suggested Citation
Nicodano, Giovanna and Regis, Luca, A Trade-off Theory of Ownership and Capital Structure (June 13, 2017). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 456/2015. Available at SSRN: https://ssrn.com/abstract=2682570 or http://dx.doi.org/10.2139/ssrn.2682570