This paper considers the optimal joint decision on firm organization and capital structure under a tax-bankruptcy trade-off, stressing the role of guarantees against default. Conditional guarantees, which are embedded in parent-subsidiary structures, increase joint value and joint debt relative to unguaranteed stand-alone firms. Such guarantees, that are unilateral rather than mutual for moderate default costs, may dominate the unconditional mutual guarantees built in mergers.We study the optimal characteristics of both guarantors and beneficiaries, as well as their impact on the self-enforcement potential of conditional guarantees. (JEL G32, G34, L22)

Guarantees, Leverage, and Taxes

LUCIANO, Elisa;NICODANO, Giovanna
2014

Abstract

This paper considers the optimal joint decision on firm organization and capital structure under a tax-bankruptcy trade-off, stressing the role of guarantees against default. Conditional guarantees, which are embedded in parent-subsidiary structures, increase joint value and joint debt relative to unguaranteed stand-alone firms. Such guarantees, that are unilateral rather than mutual for moderate default costs, may dominate the unconditional mutual guarantees built in mergers.We study the optimal characteristics of both guarantors and beneficiaries, as well as their impact on the self-enforcement potential of conditional guarantees. (JEL G32, G34, L22)
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http://rfs.oxfordjournals.org/
guarantee; bailout; debt; taxes; bankruptcy costs; limited liability; capital structure; parent subsidiary; groups; mergers
Elisa Luciano; Giovanna Nicodano
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/2318/146070
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