|
on Accounting and Auditing |
| By: | Patrick Bolton; Hui Chen; Neng Wang |
| Abstract: | We analyze a model of optimal capital structure and liquidity choice based on a dynamic tradeoff theory for financially constrained firms. In addition to the classical tradeoff between the expected tax advantages of debt and bankruptcy costs, we introduce a cost of external financing for the firm, which generates a precautionary demand for liquidity and an optimal liquidity management policy for the firm. An important new cost of debt financing in this context is an endogenous debt servicing cost: debt payments drain the firm's valuable liquidity reserves and thus impose higher expected external financing costs on the firm. The precautionary demand for liquidity also means that realized earnings are separated in time from payouts to shareholders, implying that the classical Miller-formula for the net tax benefits of debt no longer holds. Our model offers a novel perspective for the "debt conservatism puzzle" by showing that financially constrained firms choose to limit debt usages in order to preserve their liquidity. In some cases, they may not even exhaust their risk-free debt capacity. |
| JEL: | E22 G32 G35 H24 H25 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20009&r=acc |
| By: | Ryan Chahrour (Boston College); Justin Svec (College of the Holy Cross) |
| Abstract: | This paper analyzes the impact of consumer uncertainty on optimal fiscal policy in a model with capital. The consumers lack confidence about the probability model that characterizes the stochastic environment and so apply a max-min operator to their optimization problem. An altruistic fiscal authority does not face this Knightian uncertainty. We show analytically that, in responding to consumer uncertainty, the government no longer sets the expected capital tax rate exactly equal to zero, as is the case in the full-confidence benchmark model. Rather, our numerical results indicate that the government chooses to subsidize capital income, albeit at a modest rate. We also show that the government responds to consumer uncertainty by smoothing the labor tax across states and by making the labor tax persistent. |
| Keywords: | Model uncertainty, capital income tax, public debt |
| JEL: | E62 H21 |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:854&r=acc |
| By: | Callan, Tim; Keane, Claire; Savage, Michael; Walsh, John R. |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:bp2014/1&r=acc |
| By: | Bover, Olympia; Casado, Jose Maria; Costa, Sonia; Du Caju, Philip; McCarthy, Yvonne; Sierminska, Eva; Tzamourani, Panagiota; Villanueva, Ernesto; Zavadil, Tibor |
| Abstract: | The aim of this paper is twofold. First, we present an up-to-date assessment of the differences across euro area countries in the distributions of various measures of debt conditional on household characteristics. We consider three different outcomes: the probability of holding debt, the amount of debt held and, in the case of secured debt, the interest rate paid on the main mortgage. Second, we examine the role of legal and economic institutions in accounting for these differences. We use data from the first wave of a new survey of household finances, the Household Finance and Consumption Survey, to achieve these aims. We find that the patterns of secured and unsecured debt outcomes vary markedly across countries. Among all the institutions considered the length of asset repossession periods best accounts for the features of the distribution of secured debt. In countries with longer repossession periods, the fraction of people who borrow is smaller, the youngest group of households borrow lower amounts (conditional on borrowing), and the mortgage interest rates paid by low-income households are higher. Regulatory loan-to-value ratios, the taxation of mortgages and the prevalence of interest-only or fixed rate mortgages deliver less robust results. JEL Classification: D14, G21, G28, K35 |
| Keywords: | financial literacy, fixed rate mortgages, household debt and interest rate distributions, loan-to-value ratios, taxation, time to foreclose |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141639&r=acc |