How much of the corporate bond spread is due to personal taxes?

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)599-636
Journal / PublicationJournal of Financial Economics
Volume85
Issue number3
Publication statusPublished - Sept 2007

Abstract

Existing term structure models of defaultable bonds have often underestimated corporate bond spreads. A potential problem is that investors' taxes are ignored in these models. We propose a pricing model that accounts for stochastic default probability and differential tax treatments for discount and premium bonds. By estimating parameters directly from bond data, we obtain significantly positive estimates for the income tax rate of a marginal corporate bond investor after 1986. This contrasts sharply with the previous finding that the implied tax rates for Treasury bonds are close to zero. Results show that taxes explain a substantial portion of corporate bond spreads. © 2007 Elsevier B.V. All rights reserved.

Research Area(s)

  • Amortization, Default intensity, Risk-neutral valuation, Tax spreads

Citation Format(s)

How much of the corporate bond spread is due to personal taxes? / Liu, Sheen; Shi, Jian; Wang, Junbo et al.
In: Journal of Financial Economics, Vol. 85, No. 3, 09.2007, p. 599-636.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review