Taxes, endogenous financial distress costs, and the choice between private and public debt

Persistent Link:
http://hdl.handle.net/10150/280709
Title:
Taxes, endogenous financial distress costs, and the choice between private and public debt
Author:
Pereira, Raynolde
Issue Date:
2001
Publisher:
The University of Arizona.
Rights:
Copyright © is held by the author. Digital access to this material is made possible by the University Libraries, University of Arizona. Further transmission, reproduction or presentation (such as public display or performance) of protected items is prohibited except with permission of the author.
Abstract:
This dissertation examines the role of taxes and financial distress costs in the incremental financing choice between private and public debt. Theory suggests it is easier to renegotiate and restructure private debt claims outside bankruptcy. While financial distress costs may matter in the choice between private and public debt, the primary motivation for this study is to examine whether the relationship between financial distress costs and the private-public debt choice is dependent on firm's marginal tax rates. The point being firms more likely to default on their debt will exploit tax savings using private debt claims. Using a sample from the SDC database, I find a positive relationship between the issuance of private debt and the proxy for firms' financial distress costs. Additionally, I find a positive and significant relationship between the interaction of taxes and financial distress costs and the issuance of private debt claims. This supports the argument that the relationship between financial distress costs and the choice of debt is dependent on the firm's tax status. The intuition is that while financial distress costs differ between private and public debt claims, firms are likely to exploit this cost differential in the presence of positive tax savings available through the issuance of debt. Overall, the results are robust to alternative specifications of financial distress costs. The empirical models also control for variables that may lead to cost differential between private and public debt claims. I find firms with high growth opportunities are more likely to issue private debt claims. Consistent with the economies of scale argument, I find public debt tend to be denominated in large issues. I also find that large firms are more likely to issue in public debt markets. One argument here is that large firms do not require the close monitoring provided by private lenders. Finally, as documented in prior studies, I find that regulated firms are less likely to issue private debt claims.
Type:
text; Dissertation-Reproduction (electronic)
Keywords:
Business Administration, Accounting.; Economics, Finance.
Degree Name:
Ph.D.
Degree Level:
doctoral
Degree Program:
Graduate College; Industrial Management
Degree Grantor:
University of Arizona
Advisor:
Dhaliwal, Dan S.

Full metadata record

DC FieldValue Language
dc.language.isoen_USen_US
dc.titleTaxes, endogenous financial distress costs, and the choice between private and public debten_US
dc.creatorPereira, Raynoldeen_US
dc.contributor.authorPereira, Raynoldeen_US
dc.date.issued2001en_US
dc.publisherThe University of Arizona.en_US
dc.rightsCopyright © is held by the author. Digital access to this material is made possible by the University Libraries, University of Arizona. Further transmission, reproduction or presentation (such as public display or performance) of protected items is prohibited except with permission of the author.en_US
dc.description.abstractThis dissertation examines the role of taxes and financial distress costs in the incremental financing choice between private and public debt. Theory suggests it is easier to renegotiate and restructure private debt claims outside bankruptcy. While financial distress costs may matter in the choice between private and public debt, the primary motivation for this study is to examine whether the relationship between financial distress costs and the private-public debt choice is dependent on firm's marginal tax rates. The point being firms more likely to default on their debt will exploit tax savings using private debt claims. Using a sample from the SDC database, I find a positive relationship between the issuance of private debt and the proxy for firms' financial distress costs. Additionally, I find a positive and significant relationship between the interaction of taxes and financial distress costs and the issuance of private debt claims. This supports the argument that the relationship between financial distress costs and the choice of debt is dependent on the firm's tax status. The intuition is that while financial distress costs differ between private and public debt claims, firms are likely to exploit this cost differential in the presence of positive tax savings available through the issuance of debt. Overall, the results are robust to alternative specifications of financial distress costs. The empirical models also control for variables that may lead to cost differential between private and public debt claims. I find firms with high growth opportunities are more likely to issue private debt claims. Consistent with the economies of scale argument, I find public debt tend to be denominated in large issues. I also find that large firms are more likely to issue in public debt markets. One argument here is that large firms do not require the close monitoring provided by private lenders. Finally, as documented in prior studies, I find that regulated firms are less likely to issue private debt claims.en_US
dc.typetexten_US
dc.typeDissertation-Reproduction (electronic)en_US
dc.subjectBusiness Administration, Accounting.en_US
dc.subjectEconomics, Finance.en_US
thesis.degree.namePh.D.en_US
thesis.degree.leveldoctoralen_US
thesis.degree.disciplineGraduate Collegeen_US
thesis.degree.disciplineIndustrial Managementen_US
thesis.degree.grantorUniversity of Arizonaen_US
dc.contributor.advisorDhaliwal, Dan S.en_US
dc.identifier.proquest3016462en_US
dc.identifier.bibrecord.b41889952en_US
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