estimating the tax advantage of corporate debt this paper presents estimates of the effective tax value of incremental interest deductions for corporations taking into account that they may not be able to utilize all their interest deductions fully because of either insufficient taxable income or the availability of nondebt tax shields after describing particular features of the tax code which may drive a wedge between statutory and effective tax rates for debt finance we present estimates using the treasury corporate tax model of effective tax rates for a variety of industry groupings our estimates suggest that the after tax cost of debt varies widely across industries the magnitude of the effective tax advantage to debt finance has important implications for corporate financial behavior one issue which has been examined extensively in the corporate finance literature is whether the value of the firm is affected by the firm s leverage ratio in a recent contribution deangelo and masulis 3 have shown that financing decisions can affect the value of the firm if the effective tax advantage to debt finance varies among firms or is reduced by the presence of nondebt tax shields such as investment tax credits and depreciation deductions the effective tax advantage to debt is also an important determinant of leverage related costs gordon and malkiel 5 have recently used the statutory tax rate to estimate expected bankruptcy costs induced by the corporate tax when the firm is assumed to balance the marginal tax advantage to debt with marginal expected bankruptcy costs if however the effective tax rate for interest deductions falls short of the statutory rate the magnitude of these costs may be overstated this paper presents detailed estimates of the marginal effective tax advantage to debt finance our estimates based on data in the treasury 1978 corporate master statistical file and on simulations done with the treasury corporate tax model quantify the impact of increasing interest deductions without changing other items on the corporation s income statement 1 we simulate the impact of a change in a firm s capital structure holding its investment and production decisions constant this is an appropriate procedure for estimating the marginal

the effect of business risk on corporate capital structure theory and evidence under corporate and personal taxation we demonstrate that the relation between optimal debt level and business risk is roughly u shaped this result follows from the fact that the tax liability is an option portfolio that is long in the corporate tax option and short in the personal tax option therefore the net effect of a change in business risk on the optimal debt level depends upon the relative magnitudes of the resultant marginal changes in the values of these two options results of empirical tests offer support for the predicted u shaped relationship

early and late calls of convertible bonds theory and evidence many convertible bonds are called too early or too late relative to the perfect markets decision rule of ingersoll 1977a and ingersoll 1977b we re examine the convertible call decision under corporate taxation and possible default prior to maturity our model predicts that early calls will be associated with high coupon and low call premium dividend income volatility tax rate and interest rate and late calls will be associated with high call premium dividend income tax rate and interest rate and low coupon and volatility these implications are supported by empirical tests carried out with five years of convertible call data

the significance of tax law asymmetries an empirical investigation this study uses tax return data for u s nonfinancial corporations for the period 1971 1982 to estimate the importance of restrictions on the ability of firms to use tax credits and to obtain refunds for tax losses our results suggest that the incidence of such unused tax benefits increased substantially during the early 1980s though we do not find these increases attributable to increased investment incentives during that period we present estimates of the marginal tax rate on interest payments which take into account unused tax benefits and emphasize the importance of distinguishing current tax payments from marginal tax rates in estimating the incentive to invest

contests with limited resources abstract many interesting phenomena electoral competition r d races lobbying are instances of multiple simultaneous contests with unconditional commitment of limited resources specifically the following game is analyzed two players compete in a number of simultaneous contests the players have limited resources budgets and must decide how to allocate these to the different contests in each contest the player who expends more resources than his adversary wins a corresponding prize mixed strategy equilibria are characterized in the case of identical values and budgets and the connections with the classical blotto game are analyzed

institutional determinants of capital structure adjustment speeds abstract many authors relate a firm s performance to legal and political features and the regulatory environment in which it operates this article compares firms capital structure adjustments across countries and investigates whether institutional differences help explain the variance in estimated adjustment speeds we find that legal and financial traditions significantly correlate with firm adjustment speeds more narrowly institutional features also relate to adjustment speeds consistent with the hypothesis that better institutions lower the transaction costs associated with adjusting a firm s leverage such associations between institutional arrangements and leverage adjustment speeds are consistent with the dynamic trade off theory of capital structure choice

asset substitution and structured financing this article shows how structured financing can be used to solve the asset substitution problem in a dynamic setting structuring induces the firm s owner to optimally choose the first best operating strategy even though the owner s value function might be locally convex concave which would ordinarily lead to overinvestment underinvestment in risky projects this result is demonstrated in two different continuous time settings one that is based on the risk shifting framework of leland 1998 and one that generalizes the scaled return model of green 1984 it is shown that the contractual nature of the structuring is a key determinant of the issuing firm s dynamic asset volatility furthermore unlike nonstructured financing the default conversion probability of a structured debt security may be increasing decreasing in the firm s total assets structured securities are therefore hedge assets which potentially explains the popularity of structured securities among investors and third party issuers

the debt equity choice when firms adjust their capital structures they tend to move toward a target debt ratio that is consistent with theories based on tradeoffs between the costs and benefits of debt in contrast to previous empirical work out tests explicitly account for the fact that firms may face impediments to movements toward their target ratio and that the target ratio may change over time as the firm s profitability and stock price change a separate analysis of the size of the issue and repurchase transactions suggests that the deviation between the actual and the target ratios plays a more important role in the repurchase decision than in the issuance decision

racing with uncertainty and strategic interaction between competitors as the race unfolds most of the existing literature examines one or other of these features but not the two combined our aim is to see how the efforts of competitors in a race vary with the intensity of rivalry between them in our principal model whch is of a one dimensional race it is shown that the leader in the race makes greater efforts than the follower and efforts increase as the gap between competitors decreases under certain conditions the same results hold in our second related model which is of a two dimensional race

primaries and the new hampshire effect candidates for u s presidential elections are determined through sequential elections in single states the primaries we develop a model in which candidates can influence their winning probability in electoral districts by spending money on campaigning the equilibrium replicates several stylized facts very well campaigning is very intensive in the first district the outcome of the first election then creates an asymmetry in the candidates incentives to campaign in the next district which endogenously increases the equilibrium probability that the first winner wins in further districts on the normative side our model oers a possible explanation for the sequential organization it leads in expectation to a lower level of advertising expenditures than simultaneous elections moreover if one of the candidates is the more eective campaigner sequential elections also perform better with regard to the selection of the best candidate

hedging financing and investment decisions theory and empirical tests abstract in this paper we theoretically and empirically examine the interaction between hedging financing and investment decisions a simple equilibrium model with costly financial distress suggests that as firms become more efficient at risky investments vis a vis low risk investments they will borrow less invest more in risky assets and hedge more the model also predicts a positive relationship between hedging and leverage a result consistent with debt capacity arguments we test the model empirically using a simultaneous equations framework to investigate the determinants of firm level hedging financing and investing decisions the results strongly support the hypothesis that the hedging financing and investment decisions are jointly determined in addition we find strong support for the central hypothesis that firms more efficient investing in risky technologies more aggressively hedge and use less debt financing in order to maximize their comparative advantage

the existence of equilibrium in discontinuous economic games ii applications in part i of this study we established two existence theorems for mixed strategy equilibrium in games with discontinuous payoff functions see theorems 4 4 and 5 5 in dasgupta and maskin 1986 hereafter d m 1986 in this second part we use the second of these two theorems to prove the existence of mixed strategy equilibrium in some wellknown discontinuous economic games that fail to have pure strategy equilibria the models we analyse are the bertrand edgeworth example of price setting duopolists with capacity constraints see section 2 2 price competition among firms producing differentiated products hotelling 1929 and d aspremont gabszewicz and thisse 1979 see section 2 3 spatial competition eaton and lipsey 1975 and shaked 1975 see section 3 and models of market dependent information rothschild and stiglitz 1976 and wilson 1977 section 4 the paper concludes section 5 with a classification of these models

the effect of capital structure on a firm s liquidation decision abstract a firm s liquidation can impose costs on its customers workers and suppliers an agency relationship between these individuals and the firm exists in that the liquidation decision controlled by the firm as the agent affects other individuals the customers workers and suppliers as principals the analysis in this paper suggests that capital structure can control the incentive conflict problem of this relationship by serving as a pre positioning or bonding mechanism appropriate selection of capital structure assures that incentives are aligned so that the firm implements the ex ante value maximizing liquidation policy

insecurity and the pattern of trade an empirical investigation corruption and imperfect contract enforcement dramatically reduce international trade this paper estimates the reduction using a structural model of import demand in which insecurity acts as a hidden tax on trade we find that inadequate institutions constrain trade as much as tariffs do we also find that omission of indices of institutional quality biases the estimates of typical gravity models obscuring a negative relationship between per capita income and the share of total expenditure devoted to traded goods finally we argue that cross country variation in the effectiveness of institutions and the consequent variation in the prices of traded goods offer a simple explanation for the stylized fact that high income capital abundant countries trade disproportionately with each other

empirical evidence of risk shifting in financially distressed firms this paper provides evidence of risk shifting behavior in the investment decisions of financially distressed firms using a real options framework i show that shareholders risk shifting incentives can reverse the expected negative relation between volatility and investment i test two hypotheses that are consistent with risk shifting behavior i volatility has a positive effect on distressed firms investment ii investments of distressed firms generate less value during times of high uncertainty empirical evidence using 40 years of data supports both hypotheses i further evaluate the effect of various firm characteristics on risk shifting and estimate the costs of the investment distortion

can tax convexity be ignored in corporate financing decisions abstract the standard modeling practice in corporate finance has been to assume a linear tax schedule this paper extends the structural contingent claim model of corporate finance to incorporate a more realistic convex tax schedule it is shown that tax convexity raises the optimal default boundary and thus increases the likelihood of default and also reduces the optimal leverage ratio while the former effect seems insignificant in general the effect of tax convexity on the optimal leverage ratio can be quantitatively significant we conclude that tax convexity should not be ignored in corporate financing decisions and theoretical models should use a convex tax schedule instead of a linear one thus the short answer to the question in the title is no

a sequential game model of sports championship series theory and estimation these large percentages may indicate that teams that fall behind 3 0 tend to give up in the fourth game reaching the state 3 0 is an endogenous outcome that depends on the relative ability of the teams uncontrolled differences in the strengths of the teams induce positive serial correlation across the outcomes of games within a series this serial correlation could be mistaken for dependence of outcomes on the state of the series however estimates of the structural model do not support the notion that strategic incentives matter in the championship series of any of the three sports nor are the estimates of unobserved heterogeneity in relative team ability significant in any of the sports the estimated strategic effect is largest in hockey but both it and unobserved heterogeneity are still small in magnitude compared to home field advantage in short cliches such as a team played with its back against the wall or is better than it appears on paper are not evident in the data our analysis relates to some research on patterns in sports statistics concerning momentum much of this work such as tversky and gilovich s 1989 well known analysis of shooting streaks in basketball studies individual offensive performance it is difficult to relate momentum of this type to strategic interactions in a symmetric situation since defensive performance may have a momentum of its own that it is harder to measure jackson and mosurski 1997 and magnus and klaasen 1996 analyze outcomes of tennis tournaments which like championship series are symmetric contests jackson and mosurski find the outcomes of sets within a match to be correlated which is consistent with the incentive effects present in our model magnus and klaasen analyze individual points at wimbledon and they find complicated correlations between the state of the match and the outcomes of points for example they conclude that seeded players play important or critical points better than non seeded players which is consistent with our framework of ability differences combined with variable effort levels that depend upon the state of the larger competition the model adapts and extends the tournament models of lazear and rosen 1981 and rosen 1986 to a sequential environment ehrenberg and bognanno 1990 craig and hall 1994 and taylor and trogdon 1999 analyze sports data in the spirit of the tournament model ehrenberg and bognanno study whether performance of professional golfers is related to the prize structure of the tournament and craig and hall interpret outcomes of pre season nfl football games as a tournament among teammates for positions on their respective teams our focus is on aggregate team performance at the last stage of the season when the primary objective would not appear to be competition for positions using a random effects logit taylor and trodgon

debt and the marginal tax rate abstract do taxes affect corporate debt policy this paper tests whether the incremental use of debt is positively related to simulated firm specific marginal tax rates that account for net operating losses investment tax credits and the alternative minimum tax the simulated marginal tax rates exhibit substantial variation due to the dynamics of the tax code tax regime shifts business cycle effects and the progressive nature of the statutory tax schedule using annual data from more than 10 000 firms for the years 1980 1992 i provide evidence which indicates that high tax rate firms issue more debt than their low tax rate counterparts

on the debt capacity of growth options we relate the value of growth options in the firm s investment opportunity set to the level of debt in the firm s capital structure underinestment costs of debt increase and free cash flow benefits fall with additional growth options thus if debt capacity is defined as the amount of debt the firm optimally adds for an incremental project then the debt capacity of growth options is negative this result implies that book leverage should fall with the addition of growth options our tests using a large sample of industrial firms confirm this prediction

capital structure and interaction among firms in output markets theory and evidence i develop a simple model that examines the relations between the extent of competitive interaction among firms in output markets their capital structures and the aggressiveness of their operating strategies a firm s optimal leverage is related to the degree to which its operating strategy affects its rivals value functions and resulting optimal output market choices this relation is positive regardless of whether the competition in output markets is in strategic substitutes or in strategic complements i test the model s prediction using two proxies for the extent of competitive interaction among firms the empirical evidence provides support for the model

on the existence of an optimal capital structure theory and evidence one of the most contentious issues in the theory of finance during the past quarter century has been the theory of capital structure the geneses of this controversy were the seminal contributions by modigliani and miller 18 19 the general academic view by the mid 1970s although not a consensus was that the optimal capital structure involves balancing the tax advantage of debt against the present value of bankruptcy costs no sooner did this general view become prevalent in the profession than miller 16 presented a new challenge by showing that under certain conditions the tax advantage of debt financing at the firm level is exactly offset by the tax disadvantage of debt at the personal level since then there has developed a burgeoning theoretical literature attempting to reconcile miller s model with the balancing theory of optimal capital structure e g deangelo and masulis 5 kim 12 and modigliani 17 the general result of this work is that if there are significant leverage related costs such as bankruptcy costs agency costs of debt and loss of non debt tax shields and if the income from equity is untaxed then the marginal bondholder s tax rate will be less than the corporate rate and there will be a positive net tax advantage to corporate debt financing the firm s optimal capital structure will involve the trade off between the tax advantage of debt and various leverage related costs the upshot of these extensions of miller s model is the recognition that the existence of an optimal capital structure is essentially an empirical issue as to whether or not the various leverage related costs are economically significant enough to influence the costs of corporate borrowing the miller model and its theoretical extensions have inspired several timeseries studies which provide evidence on the existence of leverage related costs trczinka 28 reports that from examining differences in average yields between taxable corporate bonds and tax exempt municipal bonds one cannot reject the miller hypothesis that the marginal bondholder s tax rate is not different from the corporate tax rate however trczinka is careful to point out that this finding does not necessarily imply that there is no tax advantage of corporate debt if the personal tax rate on equity is positive indeed buser and hess 1 using a longer time series of data and more sophisticated econometric techniques estimate that the average effective personal tax rate on equity is statistically positive and is not of a trivial magnitude more importantly they document evidence that is consistent with the existence of significant leverage related costs in the economy

team contests with multiple pairwise battles abstract we consider a multi battle team contest in which players from two rival teams form pairwise matches to fight in distinct component battles which are carried out sequentially or partially

does economic diplomacy work a meta analysis of its impact on trade and investment we review the literature on economic diplomacy and provide a meta analysis of 32 empirical studies published in 1986 2011 that deal with the trade and investment impact of economic diplomacy embassies consulates other diplomatic facilities investment and export promotion offices trade and state visits controlling for differences in research design methodology time frame and manner of data we find a positive and significant effect of economic diplomacy on international economic flows with the exception of state visits and that this is true in a sample of 627 t statistics analysed with ols and for a larger sample of 963 reported significance levels analysed with logit thus illustrating robustness with respect to sample and estimation technique our analyses show that reported effects of economic diplomacy on trade and investment in individual studies are sensitive to model specification the primary studies that investigate only one source country are less likely to report significant positive effects compared to other sciences economic studies are less likely to report significantly positive effects of economic diplomacy primary studies lump embassies and consulates general into one indicator miss that these instruments differ significantly embassies consulates and agencies should thus be included as separate instruments in future research

do personal taxes affect capital structure evidence from the 2003 tax cut abstract because the personal tax treatments of interest and dividend income likely affect the relative cost of debt and equity financing a sharp change in tax treatment could affect firms optimal leverage this paper examines the effect of the 2003 equity income tax cut on firms debt usage because this tax cut affected only individual investors we can use a difference in differences method to identify the effect of personal tax on firms leverage previous research has found that the 2003 tax cut encouraged dividend payouts and reduced the cost of equity but it provides no link to equilibrium leverage ratios we estimate that the tax cut causes the affected firms leverage to decrease by about 5 percentage points furthermore we show that the effects of the tax cut are stronger for firms with lower marginal corporate tax rates and for firms that are not financially constrained consistent with our theoretical predictions overall we find strong evidence that personal tax is an important determinant of firms optimal leverage

native language spoken language translation and trade we construct new series for common native language and common spoken language for 195 countries which we use together with series for common official language and linguistic proximity in order to draw inferences about 1 the aggregate impact of all linguistic factors on bilateral trade 2 the separate role of ease of communication as distinct from ethnicity and trust and 3 the contribution of translation and interpreters to ease of communication the results show that the impact of linguistic factors all together is at least twice as great as the usual dummy variable for common language resting on official language would say in addition ease of communication plays a distinct role apart from ethnicity and trust and so far as ease of communication enters translation and interpreters are significant finally emigrants have much to do with the role of ethnicity and trust in linguistic influence

confucius institute s effects on international travel to china do cultural difference or institutional quality matter abstractthis article uses a panel data of china s inbound tourist flows from 2005 to 2015 to investigate confucius institute ci s influence on china s tourism we find that ci as a comprehensive platform for china s foreign cultural exchange has a significant positive effect on china s tourist flows the effects of ci on china s inbound tourism are transmitted through bridging cultural gaps and promoting chinese language which reduces psychic distance and transaction costs ci also stimulates china s inbound tourist flows via reducing information asymmetry caused by different levels of institutional quality interestingly we find that the heterogeneous effects of ci on china s inbound tourism depend on institutional quality and the effects of ci to boost china s tourists are more prominent in departure countries with larger cultural difference

board of directors quality and firms debt financing the moderating effect of insider ownership evidence from omani firms abstractthis study aims to examine the direct effects of board of directors quality and insider ownership on firms capital structure and the moderating effect of insider ownership on the relationship between board of directors quality and firms capital structure the sample of this study consists of the time period 2005 2011 the final sample consists of 535 firm year observations of public nonfinancial firms listed on the muscat securities market msm the hypotheses are tested using a random effects model the results reveal that the coefficient sign on the board of directors quality is as predicted but the coefficient sign is insignificant further the results show that insider ownership is positively associated with leverage at the significant level of 10 suggesting that the inside substantial shareholders employ higher leverage with regard to the moderating effect of insider ownership the findings show that the effect of the board of directors quality leverage relationship becomes negati

multi battle contests abstract we study equilibrium in a multistage race in which players compete in a sequence of simultaneous move component contests players may win a prize for winning each component contest as well as a prize for winning the overall race each component contest is an all pay auction with complete information we characterize the unique subgame perfect equilibrium analytically and demonstrate that it exhibits endogenous uncertainty even a large lead by one player does not fully discourage the other player and each feasible state is reached with positive probability in equilibrium pervasiveness expected effort in the component contests may be non monotonic in the closeness of the race and realized individual effort may exceed the value of the prize by a factor that is proportional to the maximum number of stage victories required

the effect of national culture on the choice of entry mode characteristics of national cultures have frequently been claimed to influence the selection of entry modes this article investigates this claim by developing a theoretical argument for why culture should influence the choice of entry two hypotheses are derived which relate culture to entry mode choice one focusing on the cultural distance between countries the other on attitudes towards uncertainty avoidance using a multinomial logit model and controlling for other effects the hypotheses are tested by analysing data on 228 entries into the united states market by acquisition wholly owned greenfield and joint venture empirical support for the effect of national culture on entry choice is found

institutional quality and international trade institutions quality of contract enforcement property rights shareholder protection and the like have received a great deal of attention in recent years yet trade theory has not considered the implications of institutional differences beyond treating them simply as different technologies or taxes the purpose of this paper is twofold first we propose a simple model of international trade in which institutional differences are modeled within the framework of incomplete contracts we show that doing so reverses many of the conclusions obtained by equating institutions with productivity institutional differences as a source of comparative advantage imply among other things that the less developed country may not gain from trade and factor prices may actually diverge as a result of trade second we test empirically whether institutions act as a source of trade using data on us imports disaggregated by country and industry the empirical results provide evidence of institutional content of trade institutional differences are an important determinant of trade flows

u s worldwide taxation and domestic mergers and acquisitions a discussion abstract harris and o brien 2018 investigate whether u s tax policy distorts u s multinationals mncs investment they find that mncs facing higher repatriation tax costs engage in fewer domestic acquisitions the study re examines the results in two prior studies that found no effect hanlon et al 2015 and a positive effect martin et al 2015 by introducing a new proxy for repatriation tax costs a binary variable for whether the mnc uses the double irish structure we critique the theory underlying the prediction as well as the proxy we conclude that caution should be exercised in taking the results at face value

the dynamics of majoritarian blotto games abstract we study colonel blotto games with sequential battles and a majoritarian objective for a large class of contest success functions the equilibrium is unique and characterized by an even split each battle that is reached before one of the players wins a majority of battles is allocated the same amount of resources from the player s overall budget as a consequence a player s chance of winning any particular battle is independent of the battlefield and of the number of victories and losses the player has accumulated in prior battles this result is in stark contrast to equilibrium behavior in sequential contests that do not involve either fixed budgets or a majoritarian objective we also consider the equilibrium choice of an overall budget for many contest success functions if the sequence of battles is long enough the payoff structure in this extended game resembles an all pay auction without noise

early round upsets and championship blowouts i introduction popular discussions of tournament play often celebrate the success of underdogs in early rounds and decry the prevalence of unexciting finals such a pattern might be just a statistical illusion there are many early round matches so some upsets are inevitable and there is only one final so it is unlikely to be the most exciting match of the tournament in this article we consider instead whether the pattern might have a real foundation in the strategic allocation of effort by tournament participants we analyze a two round tournament in which a favorite and underdog play in each of the two semifinals and then one player from each match advances to the final victory in a match is probabilistic in that the chance of winning is increasing in each player s relative quality and in his relative effort expenditure 1 each player has a fixed amount of effort to exert over the two rounds unused effort is of no value and the only payoff is from winning the tournament to maximize the chance of winning each player must balance out the benefits of expending more effort in the semifinal against the opportunity cost of having less effort available for the final favorites and underdogs both have an incentive to conserve resources for the final but the trade offs they face are different a favorite plays a weak opponent in the semifinal but is likely to face a tough opponent in the final so it has a strong incentive to hold back conversely an underdog already plays a tough opponent in the semifinal so it has less incentive to conserve effort for the final 2 because of these different incentives we find that in any symmetric nash equilibrium underdogs exert more effort than favorites do in the semifinal the extra effort does not fully compensate for lower ability and underdogs are still likely to lose but the chance of an upset rises in the final round each player expends all its remaining resources so differences in abilities are no longer compressed by strategic considerations instead an underdog who makes it to the final has fewer resources left to spend than the favorite so differences in abilities are amplified and the chance of a blowout by the favorite rises if a favorite loses to an underdog in the early rounds it is often accused of looking past the underdog to its next match even if a player s strategy is optimal ex ante it might turn out to be unsuccessful ex post so such criticism is often unfair our results imply that it is rational for the favorite to hold back on resources in the semifinal even if it correctly anticipates that in equilibrium the underdog will be playing harder sometimes the strategy will backfire but on average the favorite benefits from being in a better position for the final these results are derived using a standard contest model in which each player s probability of victory in a match is a strictly increasing function of his ability and effort 3 such models were first developed to analyze rent seeking tullock 1967 1980 and similar models appear in a wide variety of areas including patent races loury 1979 election campaigns snyder 1989 compensation schemes nalebuff and stiglitz 1983 career ladders lazear and rosen 1981 lobbying baye et al 1993 and sports contests szymanski 2003 4 more specifically we model the contest as a sequential elimination ladder tournament in which players first compete in separate groups and the winners then compete against each other rosen 1986 our result that underdogs do indeed try harder than favorites in the semifinals contrasts with that of rosen 1986 p 707 8 because the favorite has a better chance of victory in the final rosen finds that winning a semifinal match is more valuable to the favorite so the favorite tries harder than the underdog we reach the opposite conclusion because we assume that there is a fixed supply of effort to be used across rounds and unused effort in the tournament has no value

optimal priority structure capital structure and investment we study the interaction between financing and investment decisions in a dynamic model where the firm has multiple debt issues and equityholders choose the timing of investment jointly optimal capital and priority structures can virtually eliminate investment distortions because debt priority serves as a dynamically optimal contract examining the relative efficiency of priority rules observed in practice we develop several predictions about how firms adjust their priority structure in response to changes in leverage credit conditions and firm fundamentals notably financially unconstrained firms with few growth opportunities prefer senior debt while financially constrained firms with or without growth opportunities prefer junior debt moreover lower rated firms are predicted to spread priority across debt classes finally our analysis has a number of important implications for empirical capital structure research including the relations between market leverage book leverage and credit spreads and tobin s q the influence of firm fundamentals on the agency cost of debt and the conservative debt policy puzzle the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

a tug of war team contest this paper analyzes a tug of war contest between two teams in each round of the tug of war a pair of agents from the opposing teams competes in a private value all pay auction with asymmetric value distributions and effort effectiveness whichever team arrives first at a given lead in terms of battle victories over the opponent wins the tug of war there exists a unique markov perfect equilibrium in bidding strategies which depend on the respective player s valuation and the current state of the tug of war we derive rich comparative statics for this equilibrium by using the fact that the state of the tug of war evolves according to a time homogeneous absorbing markov chain

the existence of equilibrium in discontinuous economic games i theory the article presents information about the existence of equilibrium in discontinuous economic games in this paper and its sequel presents study the existence of nash equilibrium in games where agents payoff functions are discontinuous the enquiry is motivated by a number of recent studies that have uncovered serious existence problems in seemingly innocuous economic games in the sequel to this paper authors have explained the utility function in the economic games referred to earlier are neither continuous nor quasi concave however they demonstrate that the payoff functions in mildly modified versions of these constructs exhibit two weaker forms of continuity which together with the requirement of quasi concavity suffice for the existence of an equilibrium from this one may conclude that at least in the modified versions of these models discontinuities in the payoff functions are not the real source of the problem rather it is the failure of the payoff functions to the quasi concave which is responsible for the non existence of equilibrium these observations bear on the existence of nash equilibrium in pure strategies

the role of target leverage in security issues and repurchases the paper examines whether security issues and repurchases adjust the capital structure toward the target the time series patterns of debt ratios imply that only debt reductions are initiated to offset the accumulated deviation from target leverage the importance of target leverage in earlier debt equity choice studies is driven by the subsample of equity issues accompanied by debt reductions unlike debt issues and reductions equity issues and repurchases have no significant lasting effect on capital structure therefore even firms that have target debt ratios can engage in timing the equity market

orchestrating rent seeking contests contests have different sometimes quite complex organisational structures in particular while most of the existing literature focusses on simultaneous contests multistage contests are also quite frequently encountered this paper seeks to provide a rationale for the latter by endogenising the choice of a contest structure which is made by an organiser of a contest interested in maximising the efforts expended by the contenders

taxes and capital structure evidence from firms response to the tax reform act of 1986 while the theoretical relation between taxes and capital structure has been extensively analyzed the empirical evidence on this issue has thus far been inconclusive one of the main difficulties confronting previous empirical studies of the cross sectional relationship between taxes and leverage was the control of intervening variables the tax reform act of 1986 tra which drastically changed the tax regime provides a unique opportunity to assess the interaction between taxes and leverage decisions in a controlled environment the authors test the relationship between leverage and certain tax related variables for a large sample of companies in the years surrounding the enactment of tra the results support the tax based theories of capital structure the findings indicate that there exists a substitution effect between debt and nondebt tax shields and that both corporate and personal tax rates affect leverage decisions coauthors are dan givoly aharon r ofer and oded sarig article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the language effect in international trade a meta analysis abstract gravity models of international trade have been frequently applied to estimate the impact of common official or spoken language on bilateral trade this study provides a meta analysis based on 701 language effects collected from 81 academic articles on average a common official or spoken language increases trade flows directly by 44

tax planning regulatory capital planning and financial reporting strategy for commercial banks we test whether banks investment and financing policies can be explained by tax status we document changes in bank holdings of municipal bonds in response to changes in tax rules relating to deductibility of interest expense we also document an association between banks marginal tax rates and their investment and financing decisions which is consistent with the existence of tax clienteles however banks do not sort themselves perfectly into investment and financing clienteles because of adjustment costs we posit specific types of transaction cost impediments to tax planning and document that banks apparently trade off these costs against tax planning benefits article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

taxes and firm size abstract firm size has been used as a proxy for the firm s political costs and hence managers proclivity to choose income reducing accounting procedures this study provides additional evidence on this topic by examining the association between firm size and effective corporate tax rates the latter are one component of a firm s political costs the roughly fifty largest u s exchange listed firms in particular oil and gas companies and manufacturing firms have significantly higher worldwide tax rates than other firms these higher tax rates are observed primarily after the implementation of the u s 1969 tax reform act and after the opec countries raised their tax rates on u s oil producers the findings which are insensitive to alternative sources of data alternative measures of firm size and alternative measures of effective tax rates are consistent with the use in previous studies of firm size as a proxy for the firm s political costs

from custer to thermopylae last stand behavior in multi stage contests abstract in a multi stage contest known as a two player race players display two fundamental behaviors 1 the laggard will make a last stand in order to avoid the cost of losing and 2 the player who is ahead will defend his lead if it is threatened last stand behavior in particular contrasts with previous research where the underdog simply gives up the distinctive results are achieved by introducing losing penalties and discounting into the racing environment this framework permits the momentum effect typically ascribed to the winner of early stages to be more thoroughly examined i study the likelihood that the underdog will catch up i find that neck and neck races are common when the losing penalty is large relative to the winning prize while landslide victories occur when the prize is relatively large closed form solutions are given for the case where players have a common winning prize and losing penalty

corporate tax incentives and capital structure new evidence from uk firm level tax returns abstract we investigate how companies capital structure is affected by corporate income taxes using confidential company level tax returns for a large sample of uk firms exploiting variation in companies marginal tax rates we find a positive and substantial long run tax effect on leverage leverage responds more to decreases in the marginal tax rate and it responds to changes in the marginal rather than the average tax rate most importantly we find that the marginal tax rate based on tax returns has greater explanatory power for companies leverage than the marginal tax rate based on financial statements our study suggests that errors in the measurement for tax incentives using financial statements could lead to underestimation of the tax effects on capital structure

institutional differences and the direction of bilateral foreign direct investment flows are south south flows any different than the rest we explore the asymmetric effects of institutional differences on bilateral foreign direct investment fdi flows conditional on countries development levels previous experiences of foreign investors and bilateral trade relations the empirical results using bilateral fdi data from 134 countries during 1990 2009 suggest that institutional differences create entry barriers for foreign investors only in north south and south north directions and more so for the former furthermore southern investors appear to have a comparative advantage in institutionally different developing countries finally we find no evidence that investor experiences in other institutionally different countries or existing trade linkages negate the negative effect of institutional distance

interactions of corporate financing and investment decisions the effects of agency conflicts abstract we examine interactions between flexible financing and investment decisions in a model with stockholder bondholder conflicts over investment policy we find that financial flexibility encourages the choice of short term debt thereby dramatically reducing the agency costs of under and overinvestment however the reduction in agency costs may not encourage the firm to increase leverage since the firm s initial debt level choice depends on the type of growth options in its investment opportunity set the model has a number of testable predictions for the joint choice of leverage and maturity and how these choices interact with a firm s growth opportunities

does the confucius institute impact international travel to china a panel data analysis this article examines the impact of confucius institutes on inbound travel to china we estimate a panel gravity model of inbound tourism flows to china between 2004 and 2010 we use a poisson pseudo maximum likelihood estimator to control for heteroscedasticity endemic in gravity models santos silva and tenreyro 2006 we find that the presence of confucius institute s in the source country increases overall tourism in general and business and worker tourists in particular

alliances in international governmental organizations regional trade agreement formation and multinational enterprise regionalization strategy abstract drawing from political science alliance theories we explain why countries are likely to enter regional trade agreements we argue that the probability that this will happen is higher if the countries are allies in the same international governmental organizations igos as such alliances can help build trust and reduce political risk our results show that igo scope and also partner reliability and influence in the igo network play important roles our findings provide guidance to multinational enterprises in formulating regionalization strategies

a knowledge and physical capital model of international trade flows foreign direct investment and multinational enterprises abstract this paper addresses two important issues at the nexus of the literatures on international trade foreign direct investment fdi foreign affiliate sales fas and multinational enterprises mnes first the introduction of a third internationally mobile factor physical capital to the standard 2 2 2 knowledge capital model of mnes with skilled and unskilled labor allows us to resolve fairly readily the puzzle in the modern mne literature that foreign affiliate sales among two identical economies completely displace their international trade intra industry trade and intra industry fdi and fas can coexist for national and multinational firms with identical productivities in identical countries second the introduction also of a third country to the model suggests a formal n country theoretical rationale for estimating gravity equations of bilateral fdi flows and fas in a manner consistent with estimating gravity equations for bilateral trade flows

the impact of depreciation savings on investment evidence from the corporate alternative minimum tax over the past decade the united states has offered investment incentives in the form of larger depreciation savings namely bonus depreciation the neoclassical investment model implies that investment responds to changes in depreciation savings but there have been few direct attempts to investigate this implication this paper examines investment patterns surrounding the 1999 shortening of the alternative minimum tax amt depreciation recovery periods finding strong evidence that firms subject to the amt increase investment in response to the amt reform the empirical results show that firms subject to the amt increase their investment measured as the ratio of capital expenditures to capital stock by around 0 0418 to 0 0622 compared to firms subject to the regular tax given their average annual investment rate of approximately 0 27 during this period the results imply a relative increase in investment of 15 23 by contrast i find that the 2002 introduction of bonus depreciation available both for firms subject to the regular tax and for firms subject to the amt affects both groups of firms similarly the estimation uses an empirical specification developed from the summers 1981 tax adjusted q model and the results imply that the responsiveness of investment to the tax term is somewhat larger than previously estimated

what drives international financial flows politics institutions and other determinants abstract this paper uses a large panel of financial flow data from banks to assess how institutions affect international lending first employing a time varying composite institutional quality index in a fixed effects framework the paper shows that institutional improvements are followed by significant increases in international finance second cross sectional models also show a strong effect of initial levels of institutional quality on future bank lending third instrumental variable estimates further show that the historically predetermined component of institutional development is also a significant correlate of international bank inflows the results thus suggest that institutional underdeveloped can explain a significant part of lucas lucas robert e 1990 why doesn t capital flow from rich to poor countries american economic review papers and proceedings 80 2 92 96 1990 paradox of why doesn t capital flow from rich to poor countries the analysis also does a first step towards understanding which institutional features affect international banking

how does industry affect firm financial structure we examine the importance of industry to firm level financial and real decisions we find that in addition to standard industry fixed effects financial structure also depends on a firm s position within its industry in competitive industries a firm s financial leverage depends on its natural hedge its proximity to the median industry capital labor ratio the actions of other firms in the industry and its status as entrant incumbent or exiting firm financial leverage is higher and less dispersed in concentrated industries where strategic debt interactions are also stronger but a firm s natural hedge is not significant our results show that financial structure technology and risk are jointly determined within industries these findings are consistent with recent industry equilibrium models of financial structure copyright 2005 oxford university press