This paper examines the capital structure puzzle that many firms appear to be are underleveraged from a tax savings perspective. The tradeoff theory of capital structure predicts that firms will borrow up to the point where the marginal value of tax shields on additional debt is just offset by the increase in the costs of financial distress. There is a general consensus that significant tax incentives are available through corporate borrowing. Nevertheless, many large and profitable companies with apparently low risk of financial distress have relatively low debt ratios. The perceived inefficiency of capital structure from a tax perspective is particularly surprising, since taxes seem to be “important” or “very important” to most of the CFOs surveyed by Graham and Harvey (2001).
Several studies have documented a negative relation between profitability and leverage, challenging the tradeoff theory, suggesting that firms do not fully exploit their tax shields and therefore, appear to be underleveraged (see, e.g., Miller (1977), Fama and French (2002) and Rajan and Zingales (1995) among others). Recently, Graham (2000) quantified the tax benefits of corporate borrowing by estimating marginal tax rates and concluded that “the firms that use debt conservatively are large, profitable, liquid, in stable industries”, and face low ex ante costs of distress. He estimates that the typical firm could add up to 15.7% (7.3%) to firm value, ignoring (considering) the personal tax penalty on debt financing.
It is a given that the ties that link the developed and developing economies seem to be ever strengthening or binding depending upon one’s perspective. Economic events that in a previous decade would hardly elicit a nod from the policy community now provoke vigorous responses from average citizens and small and medium firms.
This statement applies with even greater force when considering the interactions between the developed countries and the newly industrializing and developing economies of East Asia. Vast capital flows to the region set the stage for the boom and bust cycle of the 1990s. The rapid recovery from the resulting East Asian financial crises was partly attributable to the very high share of electronics trade with the US at exactly the same time that the New Economy boom was underway. And more recently, the insatiable American demand for capital has been aided and abetted by the economic policies set in the capitals of Asia Pacific.
The National Institute of Dental and Craniofacial Research (NIDCR) is very pleased to sponsor this workshop on the oral complications and associations with insulin-dependent diabetes mellitus. It is estimated that more than 10 million Americans suffer from diabetes, and another six million people are yet to be diagnosed.
