Hostname: page-component-84b7d79bbc-g7rbq Total loading time: 0 Render date: 2024-07-28T08:16:04.375Z Has data issue: false hasContentIssue false
  • English
  • Français

The Relative Tax Benefits of Alternative Call Features in Corporate Debt

Published online by Cambridge University Press:  06 April 2009

Ivan E. Brick  and
Buckner A. Wallingford
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines the differential tax treatment of the borrower and lender at the time debt is called as a potential explanation for the widespread existence of call provisions in corporate debt. This tax effect alone cannot explain the standard call feature because greater tax benefits may be derived for bonds callable at market prices. The equilibrium implications of the model allowing for tax arbitrage opportunities both at the corporate level and the individual level also are considered.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 20 , Issue 1 , March 1985 , pp. 95 - 105
Copyright
Copyright © School of Business Administration, University of Washington 1985

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

[1]Aitchison, J., and Brown, J.. The Lognormal Distribution with Special References to Its Uses in Economics. Cambridge, England: Cambridge University Press (1957).Google Scholar
[2]Barnea, A.; Haugen, R. A.; and Senbet, L. W.. “A Rationale for Debt Maturity Structure and Call Provisions in the Agency Theoretic Framework.” Journal of Finance, Vol. 35 (12 1980), pp. 1223–1234.CrossRefGoogle Scholar
[3]Barnea, A.; Haugen, R. A.; and Senbet, L. W.. “An Equilibrium Analysis of Debt Financing under Costly Tax Arbitrage and Agency Problems.” Journal of Finance, Vol. 36 (06 1981), pp. 569–581.CrossRefGoogle Scholar
[4]Black, F., and Scholes, M.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, Vol. 81 (05/06 1973), pp. 637–654.CrossRefGoogle Scholar
[5]Bodie, Z., and Taggart, R.. “Future Investment Opportunities and the Value of the Call Provision on a Bond.” Journal of Finance, Vol. 31 (03 1976), pp. 1187–1200.Google Scholar
[6]Boyce, W., and Kalotay, A.. “Tax Differentials and Callable Bonds.” Journal of Finance, Vol. 34 (09 1979), pp. 825–838.CrossRefGoogle Scholar
[7]Caks, J. “Corporate Debt Decisions: A New Analytical Framework.” Journal of Finance, Vol. 33 (12 1978), pp. 1297–1317.CrossRefGoogle Scholar
[8]Cox, J., and Ross, S.. “The Valuation of Options for Alternative Stochastic Processes.” Journal of Financial Economics, Vol. 3 (01/03 1976), pp. 637–659.CrossRefGoogle Scholar
[9]DeAngelo, H., and Masulis, R.. “Leverage and Dividend Irrelevancy under Corporate and Personal Taxation.” Journal of Finance, Vol. 35 (05 1980), pp. 453–464.CrossRefGoogle Scholar
[10]DeAngelo, H., and Masulis, R.. Optimal Capital Structure under Corporate and Personal Taxation.” Journal of Financial Economics, Vol. 8 (03 1980), pp. 3–30.CrossRefGoogle Scholar
[11]Marshall, W., and Yawitz, J.. “Optimal Terms of the Call Provision on a Corporate Bond.” Journal of Financial Research, Vol. 3 (Summer 1980), pp. 202–211.CrossRefGoogle Scholar
[12]Miller, M. H. “Debt and Taxes.” Journal of Finance, Vol. 32 (05 1977), pp. 261–275.Google Scholar
[13]Miller, M. H., and Scholes, M.. “Dividends and Taxes.” Journal of Financial Economics, Vol. 6 (12 1978), pp. 333–364.CrossRefGoogle Scholar
[14]Modigliani, F. F., and Miller, M. H., “Corporation Income Taxes and Cost of Capital: A Correction.” American Economic Review, Vol. 53 (06 1963), pp. 433–443.Google Scholar
[15]Yawitz, J., and Anderson, J.. “The Effect of Refunding on Shareholder Wealth.” Journal of Finance, Vol. 32 (06 1977), pp. 1738–1746.CrossRefGoogle Scholar
[16]Yawitz, J., and Anderson, J.. “The Effect of Bond Refunding on Shareholder Wealth: Reply.” Journal of Finance, Vol. 34 (06 1979), pp. 805–809.CrossRefGoogle Scholar
[17]Yawitz, J., and Marshall, W.. “The Valuation of the Option Portion of a Callable Bond: A Bias in the Tax Laws.” Paper presented at the Financial Management Meetings (10 1977).Google Scholar