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Tax benefit and bankruptcy cost of debt

Author

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  • Ricca, Leandro Telles
  • Jucá, Michele Nascimento
  • Hadad Junior, Eli

Abstract

Different theories seek to substantiate the main determinants of companies’ capital structure. For the trade-off theory, there may be an optimal capital structure in which companies seek a balance between bankruptcy risk and tax benefits generated by the deduction of debt interest. Despite the relevance of both aspects, their joint analysis is not sufficiently studied. Thus, this study seeks to understand whether companies show conservative behavior in relation to their low leverage level. In addition, whether a possible non-optimizing of tax benefits, arising from indebtedness, is due to a higher ex-ante bankruptcy cost for the company or due to the existence of other non-debt tax benefits is intended to verify. For this purpose, tests are performed with simultaneous equations - generalized method of moments and ordered probit - and Tobit regression. The sample comprises non-financial publicly held Brazilian companies. Data are analyzed during the period from 2009 to 2018. As a result, both hypotheses are confirmed - H1 - Increased leverage results from higher debt tax benefits than ex-ante bankruptcy costs and H2 - Companies do not optimize debt tax benefits due to factors other than debt.

Suggested Citation

  • Ricca, Leandro Telles & Jucá, Michele Nascimento & Hadad Junior, Eli, 2021. "Tax benefit and bankruptcy cost of debt," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 82-92.
    • Handle: RePEc:eee:quaeco:v:81:y:2021:i:c:p:82-92
    DOI: 10.1016/j.qref.2021.05.003
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    More about this item

    Keywords

    Trade-off theory; Tax benefits; Bankruptcy risk; Simultaneous equations; Ordered probit regression; Tobit regression;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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