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Guarantees, Leverage, and Taxes

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This paper characterizes optimal intercorporate guarantees, under the classical trade-off between bankruptcy costs and taxation. Conditional guarantees, allowing the provider to maintain limited liability vis-?-vis the beneficiary, maximize joint value. They indeed achieve the highest tax savings net of default costs. We provide conditions ensuring that - at the optimum - guarantees increase total debt, which bears mostly on the beneficiary. This difference in optimal leverage between the provider and the beneficiary explains why optimal conditional guarantees (i) generate value independently of cash flow correlation (ii) are unilateral rather than mutual, at least for moderate default costs (iii) dominate the unconditional ones, that are embedded in mergers, at least when firms have high cash-flow correlation. We also endogenize the choice of the guarantor, showing that it has higher proportional bankruptcy costs and lower tax rates..Printed Journal

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Ketersediaan

Call Number	Location	Available
RFS2709	PSB lt.dasar - Pascasarjana	1

Penerbit	Oxford Oxford University Press.,
Edisi	-
Subjek	Debt Mergers Taxes Capital structure Groups Subsidiary bankruptcy costs limited liability
ISBN/ISSN	8939454
Klasifikasi	-
Deskripsi Fisik	-
Info Detail Spesifik	-
Other Version/Related	Tidak tersedia versi lain
Lampiran Berkas	Tidak Ada Data