Karan Bhanot , Pascal François , Palani-Rajan Kadapakkam
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Abstract
Using an earnings-based structural model, calibrated with US data for the period 2001–2017, we examine how the structure of an interest expense cap for the deduction of interest expense changes the tax benefits of debt. We find that an EBIT (EBITDA) based cap reduces the marginal tax benefits of debt by 6 percentage points (4.6 p.p.) of unlevered firm value for a typical firm. This impact differs across industries due to variations in industry-specific labor and physical capital deployed, and the associated depreciation. An EBITDA-based structure for a cap reduces the differential tax impact of a cap across industries. Our results are widely applicable in determining the cost of debt in the presence of these cap structures, enshrined in the US and OECD countries.
期刊介绍：
The Journal of Corporate Finance aims to publish high quality, original manuscripts that analyze issues related to corporate finance. Contributions can be of a theoretical, empirical, or clinical nature. Topical areas of interest include, but are not limited to: financial structure, payout policies, corporate restructuring, financial contracts, corporate governance arrangements, the economics of organizations, the influence of legal structures, and international financial management. Papers that apply asset pricing and microstructure analysis to corporate finance issues are also welcome.
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