A Trade-off Theory of Ownership and Capital Structure

58 Pages Posted: 30 Oct 2015 Last revised: 18 Sep 2018

See all articles by Giovanna Nicodano

Giovanna Nicodano

University of Turin - Department ESOMAS; Collegio Carlo Alberto; EGCI; Netspar

Luca Regis

University of Turin

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

Nicodano, Giovanna and Regis, Luca, A Trade-off Theory of Ownership and Capital Structure (June 13, 2017). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2682570 or http://dx.doi.org/10.2139/ssrn.2682570

Giovanna Nicodano (Contact Author)

University of Turin - Department ESOMAS ( email )

Turin, 10134

HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano/

Collegio Carlo Alberto ( email )

Piazza Arbarello 8
Torino, Torino 10121
390116705006 (Phone)

HOME PAGE: http://https://www.carloalberto.org/person/giovanna-nicodano

EGCI ( email )

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Netspar ( email )

P.O. Box 90153
Tilburg, 5000 LE

Luca Regis

University of Turin ( email )

Corso Unione Sovietica 218 bis
Torino, Turin 10100

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