Dividend Policy, Personal Taxes and Optimal Capital Structure

Sheen Liu; Yan Alice Xie

doi:10.18282/ff.v9i2.713

Sheen Liu Washington State University
Yan Alice Xie University of Michigan-Dearborn

Ariticle ID: 713

200 Views, 36 PDF Downloads

DOI: https://doi.org/10.18282/ff.v9i2.713

Keywords: Capital Structure, Dividend Policy, Personal Taxes, Credit Spread

Abstract

This paper puts forwardÂ a capital structure model that incorporates the impacts of dividend policy and personal taxes that are commonly ignored by the existing capital structure models. TheÂ results show that paying dividends can reduce the tax benefits from issuing debts, which explains why existing capital structure models commonly overestimate leverage ratios. TheÂ results further show that as dividend payout increases, leverage ratios and credit spreads increase too. By incorporating the impacts of dividend policy and personal taxes, theÂ capital structure model established in this paper can generate wide range of leverage ratios and credit spreads, which are consistent with what are observed in the real world.

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