The Research On Income Tax Effect Of Corporate Debt Financing

This paper researches three different financing channels including internal financing, debt financing and equity financing, and probes into the important factors which affect corporate financing decisions, such as tax. After considering bankruptcy cost, we analyze the tax effect of debt financing.Tax is one of the most important and direct factors which affect financing decisions, because the tax advantage of debt financing can enhance a company's value. The paper aims to expound the effect of corporate income tax and personal income tax on debt financing, and compare three different financing channels with the related tax treatment. Since bankruptcy costs arising from excessive debt will lead to the decline of the company's value, a company can not increase its debt so as to obtain the income tax effects of debt financing without limit. Therefore, this paper highlights corporate bankruptcy costs.For quantitative analysis of the income tax effect of debt financing, the paper expands Miller model by introducing bankruptcy costs and capital gains tax. After considering related corporation income tax and all forms of personal income tax, we obtain the tax advantage equation under the existing taxation system, which provides a theoretical model for further empirical analysis.We conclude that, as for the impact of tax, the enterprise could increase its company's value by increasing debt if there is income tax effect of debt financing, with the precondition that it hasn't exceeded the ceiling value of debt. Our empirical analysis of listed companies shows that there exist both debt capacity and tax advantage of debt financing for the majority of those companies, thus we suggest that they take full advantage of the income tax effect of debt financing and maximize the value of the enterprise by increasing the proportion of debt.