Taxes and the choice between risky and risk-free debt: on the neutrality of credit default taxation

Blaufus, Kay; Hundsdoerfer, Jochen

doi:10.1007/s11846-008-0020-3

Cited by 11 publications

(2 citation statements)

References 14 publications

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“…Additionally, Miles and Ezzell (1980) and Miles and Ezzell (1985) derive risk-adjusted discount rates in a multiperiod setting with corporate taxes and with constant leverage. In the more recent literature, several authors include the taxation of a COD into their analyses of corporations with risky debt [see e.g., (Kruschwitz and Löffler 2006;Cooper and Nyborg 2008;Blaufus and Hundsdoerfer 2008)]. …”

Section: Introductionmentioning

confidence: 99%

De and re-levering betas with risky debt

Krause¹

2018

Bus Res

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De-and re-levering betas is important to obtain discount rates for assets that are not publicly traded. A de-and re-levering procedure is around for the case of risk-free debt. The procedure for risky debt is much less clear even under very simplifying assumptions. In this paper, I concretize and extend the procedure for deand re-levering of betas for companies with risky debt. I derive procedures for different assumptions on the taxation of a cancellation of debt (COD) and for different assumptions regarding the distribution of losses on interest and principal payments. With a tax on the COD I obtain known results. However, without taxes on a COD, the distribution of losses on interest and principal payments matters and equations differ markedly for different assumptions on the assignment of losses to interest and principal payments. Furthermore, using a procedure that does not fit the COD treatment is likely to lead to substantial deviations for de-and re-levered betas from their correct values.

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Section: Introductionmentioning

confidence: 99%

De and re-levering betas with risky debt

Krause¹

2018

Bus Res

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“…For the purpose of our study we extend a model previously used by Blaufus and Hundsdoerfer (2008) and Blaufus and Mantei (2014) to incorporate leverage-based as well as EBITDA-based IDR. In a baseline model we will assume full loss offset, full deductibility of interest expenses as well as full taxability of default gains and show that this will lead to organizational form neutrality if tax rates for both forms are identical.…”

Section: Introductionmentioning

confidence: 99%

Interest deductibility restrictions and organizational form

Blaufus

Kreinacke

Mantei

2014

Bus Res

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Using a theoretical model for risky investment decisions, we study the effect of interest deductibility restrictions on the choice of organizational form. We analyze the two most widely used approaches: first, rules that limit the interest deductibility if the firm’s leverage exceeds a specific level, and second, rules that restrict the interest deduction if the interest expenses exceed a specific percentage of the firm’s earnings. Although these restrictions apply uniformly for partnerships and corporations in many countries, we find that they usually distort the choice of organizational form. We demonstrate that only leverage-based interest deductibility restrictions can in theory be modified to achieve organizational form neutrality. However, this requires a legal form dependent application or absence of dividend taxation and in any case a full loss offset which is in contrast to current law in many countries. If one considers corporate loss offset limitations, both types of interest deductibility restrictions always distort the choice of organizational form. Thus, the introduction of interest deductibility restrictions is actually in conflict with the legislators’ often declared aim to design tax systems that are neutral with respect to the choice of organizational form.

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„Finanzierungsneutralität der Besteuerung“ als politischer Wunsch und als Widersprüchlichkeit in der erklärenden Theorie, oder: Quo vadis, Arqus?

Schneider¹

2009

Schmalenbachs Z betriebswirtsch Forsch

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Taxes and the choice between risky and risk-free debt: on the neutrality of credit default taxation

Abstract: Tax neutrality, Default risk, Capital structure, Firm valuation, Financial neutrality, G32, G33, H25,

Cited by 11 publications

References 14 publications

De and re-levering betas with risky debt

De and re-levering betas with risky debt

Interest deductibility restrictions and organizational form

„Finanzierungsneutralität der Besteuerung“ als politischer Wunsch und als Widersprüchlichkeit in der erklärenden Theorie, oder: Quo vadis, Arqus?

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