Graham (00), Jf, How Big Are Tax Benefits Of Debt

THE JOURNAL OF FINANCE VOL. LV, NO. 5 OCT. 2000 How Big ar the Tax Benefits of Debt? JOHN R. GRAHAM* ABSTRACT I integrate chthonic self-coloured-specific benefit functions to estimate that the capitalized revenue benefit of debt equals 9.7 per centum of firm shelter ~or as first as 4.3 percent, exonerate of personal assess incomees!. The typical firm could double tax benefits by issuing debt until the marginal tax benefit begins to decline. I hazard how aggressively a firm uses debt by observant the order of its tax benefit function. Paradoxically, large, liquid, profitable firms with low expect trauma costs use debt rightly. Product market factors, maturation options, low asset collateral, and planning for future expenditures lead to conservative debt usage. conservativist debt policy is persistent. DO THE TAX BENEF ITS of debt affect incarnate pay decisions? How much do they add to firm value? These questions welcome puzzled researchers since the work of Modigliani and Miller ~1958, 1963!. Recent rise indicates that tax benefits are one of the factors that affect financing weft ~e.g., MacKie-Mason ~1990!, whole meal flour ~1996a!!, although opinion is not consentaneous on which factors are more or less grand or how they contribute to firm value ~Shyam-Sunder and Myers ~1998!, Fama and French ~1998!!.

Researchers plaque several problems when they investigate how tax incentives affect incorporate fiscal policy and firm value. Chief among these problems is the difficulty of reckon corporate tax rates due to data problems and the complexity of the tax code. Other challenges include quantifying the eff! ects of interest taxation at the personal level and understanding the bankruptcy do by and the attendant costs of financial distress. In this * Graham is at the Fuqua School of Business, Duke University. Early conversations with Rick Green, Eric Hughson, Mike Lemmon, and S. P. Kothari were helpful in formulating some of the ideas in this paper. I thank Peter scene for providing the bond...If you want to get a full essay, order it on our website: OrderCustomPaper.com

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