Liquid Yield Option Notes and Mandatorily Redeemable Preferred Stock: A Comparison of Marginal Tax Rates and Debt Levels of Contrasting Financial Instruments

摘要

Corporate capital structure decisions depend on various factors. Scholes and Wolfson (1992) suggest that a firm's capital structure choices are a function of changes in tax costs compared to changes in non-tax costs. This study examines this issue by comparing mandatorily redeemable preferred stock (MRPS) and liquid yield options notes (LYONS) from the perspective of tax and reporting incentives as possible motives for firms issuing these two instruments. Specifically, the marginal tax rates and debt levels are compared for firms issusing MRPS and firms issuing LYONS. The results show that marginal tax rates are greater for firms issuing LYONS than for firms issuing LYONS. Regression results show that both marginal tax rates and debt levels were significant in predicting the level of MRPS and LYONS, but debt level seemed to be the more important.