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Tax loss carry-forwards and optimal leverage

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  • Pascal Francois

Abstract

Standard contingent claims models of the levered firm examine capital structure choices with the assumption that full offsets of corporate losses are allowed. However, restrictions on tax loss carry-forwards (TLCF) are the rule rather than the exception. The EBIT model of Goldstein et al. (2001) is extended to measure how optimal leverage is affected by restrictions on TLCF. The restricted TLCF case reconciles the static trade-off model with the evidence that (i) optimal leverage is decreasing with firm growth and (ii) firms benefiting from TLCF may issue debt less aggressively.

Suggested Citation

  • Pascal Francois, 2006. "Tax loss carry-forwards and optimal leverage," Applied Financial Economics, Taylor & Francis Journals, vol. 16(14), pages 1075-1083.
    • Handle: RePEc:taf:apfiec:v:16:y:2006:i:14:p:1075-1083
    DOI: 10.1080/09603100500426549
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    References listed on IDEAS

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    Cited by:

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    2. François, Pascal & Morellec, Erwan, 2008. "Closed-form solutions to stochastic process switching problems," Journal of Mathematical Economics, Elsevier, vol. 44(11), pages 1072-1083, December.

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