A version of this article was originally published by Knowledge at Wharton
To many laymen, "슬롯사이트 추천" is a dirty word, and plenty of companies have indeed been dragged under by shouldering too much. But academics and other experts have long believed the opposite is true: Many companies take on too little 슬롯사이트 추천, failing to fully exploit benefits like the tax deductions on interest payments.
Now, a new study by three Wharton faculty members shows companies are not, in fact, foolishly leaving tax deductions on the table. The findings, based on data compiled from thousands of firms between 1980 and 1994, should be especially valuable to outsiders -- such as lenders, analysts, institutional investors and shareholders -- trying to judge the wisdom of a firm's use of 슬롯사이트 추천.
Previous studies have shown that many nonfinancial firms "are too conservative in their 슬롯사이트 추천 policies, meaning they could increase their 슬롯사이트 추천 levels to reap substantial tax benefits without significantly increasing the risk to their financial health," said Wayne R. Guay, an accounting professor at Wharton.
"Our paper shows that previous research substantially overstates the tax benefits that some firms could achieve by increasing their 슬롯사이트 추천 levels," Guay said. "Our results also suggest that most corporations appear to adopt 슬롯사이트 추천 policies that efficiently trade off the tax benefits (of 슬롯사이트 추천) with the risks to financial health."
Companies have various ways to raise money, but the most prominent are borrowing through the issue of corporate bonds or raising equity by selling new shares of stock. By selling new shares, a company avoids taking on a 슬롯사이트 추천 that must be repaid with interest. But increasing the number of shares dilutes the value of those already in circulation, so shareholders often oppose this approach. 슬롯사이트 추천 does not dilute shareholder value, but payments to 슬롯사이트 추천 holders can become a fatal burden if revenues fall short.
Often, the company's choice comes down to federal tax issues: Interest on 슬롯사이트 추천 payments is tax deductible, while dividends paid to shareholders are not. For a company with no 슬롯사이트 추천, the final dollar of earnings might shrink to only 65 cents once the corporate tax is paid. But if the company has a healthy dose of interest deductions from 슬롯사이트 추천, that dollar may still be worth a dollar after tax time.
For decades, the academic literature and marketplace have clung to a belief that many companies fail to take full advantage of 슬롯사이트 추천, which, in addition to tax deductions, can increase profits by enlarging a company's bets. Investing a dollar at a 10 percent return produces a 10-cent profit. By borrowing an additional dollar and paying 5 percent interest on the loan, the profit can be boosted to 15 cents, up 50 percent. This process was behind the leveraged buy-out craze of the 1980s. Today, private equity firms use the same logic, Guay said.
"A major strategic objective of private equity firms is to buy under-leveraged companies and then leverage them up to gain the tax advantages," he noted. But this view may be mistaken. "With our research, what we feel comfortable saying is that the tax benefits of 슬롯사이트 추천 have been grossly overestimated in many cases."
Previous research exaggerated the benefits of 슬롯사이트 추천 because it underestimated the volatility of cash flows and earnings, according to Guay. He and his fellow researchers zeroed in on that factor, he added, noting that a company's borrowing issues are similar to a homeowner's. The home buyer who pays cash makes 10 percent if the home's value rises 10 percent, and loses 10 percent if the value falls by that amount. But if the homeowner puts only 10 percent down and borrows the rest, a 10 percent gain in price means a 100 percent gain in equity, and a 10 percent decline means a 100 percent loss.
Previous studies have assessed volatility by looking at historical data. But they generally measured ups and downs in dollars, because 슬롯사이트 추천 issues, such as progressive 슬롯사이트 추천 rates, are determined by thresholds measured in actual earnings rather than percentage returns. This approach to volatility can distort the picture, since a given dollar amount is less and less significant as a company grows over the decades, Guay said. He and his colleagues got a different view by, essentially, looking at volatility in percentage terms, showing that companies with lots of leverage were more volatile.
In years when income is low, the 슬롯사이트 추천 benefits from interest payments are smaller since the company's 슬롯사이트 추천 rate will be lower. But even if the company loses money, the interest-rate deductions have value, since they deepen losses that can be carried forward and used to reduce 슬롯사이트 추천able income in subsequent years. Better understanding of the volatility of future earnings makes it easier to see how well a future 슬롯사이트 추천 deduction will pay off.
Guay's co-author Jennifer Blouin cited the example of a start-up firm that has lots of 슬롯사이트 추천 and little or no revenue, meaning there is no taxable income. "They are generating interest deductions that don't do them any good today," she said. Previous research has underestimated the probability the firm will have losses in the future, she added. That makes the interest deduction carried forward seem more valuable than it may actually be, because it overstates the taxable income that the deduction can be used to reduce.
For a clearer view of this, she and her colleagues grouped similar firms together in their analysis. Like individual 슬롯사이트 추천 rates, corporate 슬롯사이트 추천 rates are on a progressive scale, with the rate rising as income goes up. Interest deductions have the most value when they reduce the income subject to the highest 슬롯사이트 추천 rate the firm pays. If the deduction is so big as to cut income to a level 슬롯사이트 추천ed at a lower rate, the deduction has less value. A deduction applied against income 슬롯사이트 추천ed at 35 percent, for example, would save the company 35 cents on every dollar of income, while a deduction against income in the 25 percent bracket would save just 25 cents.
The researchers identified the point at which the deduction started to lose value -- the "kink." They found that the firms they studied typically had just the right amount of 슬롯사이트 추천 to get the most out of their interest-rate deductions, while previous research that did not look as closely at income volatility had shown firms needed to more than double their 슬롯사이트 추천 loads to maximize their interest deductions.
