How Big Are the Tax Benefits of Debt?

How Big Are the Tax Benefits of Debt?

JOHN R. GRAHAM (2000) C’EST LE FAMEUX ARTICLE OÙ LA MÉTHODE EST NULLE. Perder pas trop de temps avec celui-la. ABSTRACT

I integrate under firm-specific benefit functions to estimate that the capitalized tax benefit of debt equals 9.7 percent of firm value or as low as 4.3 percent, net of personal taxes!. The typical firm could double tax benefits by issuing debt until the marginal tax benefit begins to decline. I infer how aggressively a firm uses debt by observing the shape of its tax benefit function. Paradoxically, large, liquid, profitable firms with low expected distress costs use debt conservatively. Product market factors, growth options, low asset collateral, and planning for future expenditures lead to conservative debt usage. Conservative debt policy is persistent. 1. Mesure de conservatisme : le kink

Each curve is plotted by connecting marginal tax rates that are simulated as if the firm took interest deductions in 1991 equal to zero, 20, 40, 60, 80, 100, 120, 160, and 200 percent of those actually taken. Each point on the curves is a marginal tax rate for a given amount of interest and therefore represents the net benefit of interest deductions in terms of how much a firm’s tax liability is reduced due to an incremental dollar of deduction. The area under the benefit curve to the left of actual interest deducted measures the tax benefit of debt. Le kink, c’est le seuil à partir duquel les bénéfices d’une augmentation de la déduction d’intérêt commencent à baisser. The larger the kink, the greater is the proportion by which interest deductions can increase without losing incremental value, and therefore the more conservative is debt policy. Lorsque le kink calculé pour la firme se situe sur la droite verticale, la situation est optimale et il est égal à 1. Quand le kink est à droite de la droite verticale des 100% (>1), alors la firme est conservatrice et aurait intérêt à augmenter son endettement pour...