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Journal of Finance Vol. 51 No. 4 1996

Tax‐Exempt Debt and the Capital Structure of Nonprofit Organizations: An Application to Hospitals

Gerard J. Wedig; Mahmud Hassan1; Michael A Morrisey1,2

1 University of Alabama at Birmingham · 2 The Centre for Health (New Zealand)

Abstract

The availability of tax‐exempt financing provides nonprofit (NP) organizations with their own tax‐based incentives to issue debt. In this article, we develop a theoretical model in which NPs gain an indirect arbitrage from tax‐exempt debt issuance, constrained by: 1) the requirement that fixed investment exceed tax‐exempt debt flows (the project financing constraint), and 2) the constraint against share issuance. These constraints cause them to impute tax benefits to projects that afford access to the tax‐exempt bond market. Empirical tests indicate that NP hospitals behave as if they have target levels of tax‐exempt debt. Debt targeting is constrained by the availability of capital projects, while excess debt capacity stimulates investment.

DOI
10.1111/j.1540-6261.1996.tb04069.x
Volume
51
Issue
4
Pages
1247-1283
Language
en
Sources
crossref openalex

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