Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/96875 
Year of Publication: 
2014
Series/Report no.: 
CESifo Working Paper No. 4772
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
In this article we study the corporate tax effects on credit market equilibria. In particular, we develop a model that accounts for five pieces of evidence: i) the existence of a tax incentive to borrow, ii) the negative relationship between leverage and profitability, iii) the existence of asymmetric information in credit markets, iv) the screening activity of lenders and v) the business cycle effects on the spread between the high-yield and the investment-grade interest rates on corporate loans. Assuming the existence of two types of firms, we show that either a separating or a pooling credit market equilibrium can arise. More importantly, the equilibrium is crucially affected by corporate taxation. Given these results, we also provide a welfare analysis and discuss corporate tax policy implications.
Subjects: 
capital structure
corporate taxation
asymmetric information
JEL: 
H20
D82
Document Type: 
Working Paper
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