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| Author: | Brick, I. E. Fisher, L. |
| Title: | Effects of classifying equity or debt on the value of the firm under tax asymmetry. |
| Journal: | Journal of Financial and Quantitative Analysis
1987 : DEC, VOL. 22:4, p. 383-399 |
| Index terms: | COMPANY TAXATION CAPITAL STRUCTURE OF COMPANIES |
| Language: | eng |
| Abstract: | We examine the effects of classifying the firm's equity or debt into subclasses of unequal seniority on the total expected tax burden of the firm and its security holders. It is assumed that there is neither an agency nor bankruptcy costs. It is proven that when positive income is taxed at a higher rate than that allowed on realized capital losses, it is optimal if the firm has only a single class of equity and, at most, one class of debt. Our result justifies the common practice of issuing corporate bonds under open indentures. |
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