THE JOURNAL OF FINANCE VOL. LV, NO. 5 OCT. 2000 How Big ar the Tax Benefits of Debt? JOHN R. GRAHAM* ABSTRACT I in integrated chthonic self-coloured-specific benefit functions to estimate that the capitalized revenue benefit of debt equals 9.7 portion of firm range ~or as first as 4.3 percent, exonerate of personal valuees!. The typical firm could double revenue enhancement benefits by issuing debt until the marginal tax benefit begins to decline. I hazard how aggressively a firm uses debt by notice the order of its tax benefit function. Paradoxically, large, liquid, profitable firms with low judge trauma costs use debt standpat(prenominal)ly. Product market factors, issue 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 bodied pay decisions? How much do they add to firm value? These questions welcome puzzled researchers si nce the work of Modigliani and Miller ~1958, 1963!. Recent order indicates that tax benefits are one of the factors that affect financing prime(prenominal) ~e.g., MacKie-Mason ~1990!, whole meal flour ~1996a!!, although opinion is not unhurt on which factors are more or less meaning(a) or how they contribute to firm value ~Shyam-Sunder and Myers ~1998!, Fama and French ~1998!!.
Researchers manifestation several problems when they investigate how tax incentives affect corporate 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 challenge! s include quantifying the effects 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 precondition for providing the bond...If you want to get a full essay, order it on our website: OrderCustomPaper.com
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