The Relative Yields on Taxable and Tax-Exempt Debt

Deskripsi

Heaton develops a valuation model incorporating corporate tax liabilities under realistic assumptions, including the uncertainty of tax benefits due to incomplete loss offsets. The model predicts that the implied tax rate (ITR) reflects both the probability of a firm having taxable income and a risk factor tied to marginal utility. Empirical tests using commercial bank profit data (1951–1980) support the model, showing a strong correlation between ITR and banks' expected taxable income. Regression results indicate that approximately 80% of the variation in bank profits can be explained by the relative yields of taxable and tax-exempt debt, with the relationship weakening for longer maturities due to additional uncertainties.