Journal of Financial Economics Vol. 131 No. 3 2019
A trade-off theory of ownership and capital structure
open access
Abstract
This paper determines the optimal ownership share held by a unit into a second unit when both face a tax-bankruptcy trade-off. Full ownership is optimal when the first unit has positive debt, because dividends help avoid its default. Positive debt is, in turn, optimal when its corporate tax rate exceeds a threshold, and/or thin capitalization rules place an upper limit on the debt level in the second unit, and/or the Volcker Rule bans bailout transfers to the second unit. Full ownership is no longer optimal only if there is a tax on intercorporate dividend. This theory rationalizes observations on multinationals, financial conglomerates, and family groups.
- DOI
- 10.1016/j.jfineco.2018.09.001
- Volume
- 131
- Issue
- 3
- Pages
- 715-735
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref