Tax asymmetry deteriorates capital structure and credit spread

摘要

Most studies on capital structure assume linear tax schedule to simplify the models. However, non-linear tax schedules prevail in most countries. The paper studies the effect of tax asymmetry on capital structure. We show that tax asymmetry significantly reduces optimal leverage ratio and has positive effect on bankruptcy trigger, default boundary and credit spread. These changes would affect the firm’s value and financing decisions. Moreover, the inclusion of tax asymmetry has filled the gap between theoretical results and empirical observation. Since the influence of tax asymmetry is non-trivial, it should be taken into consideration for the firm’s capital structure decisions.