The Journal of Finance

Debt Management under Corporate and Personal Taxation

Published: 12/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb04366.x

DAVID C. MAUER, WILBUR G. LEWELLEN

The presence of long‐term debt in a corporation's capital structure is shown to give rise to a valuable tax‐timing option that can be exercised by the firm on behalf of its shareholders. This option, which is not available if the firm is fully equity financed, implies that leverage will have a positive tax effect on total firm value even if there is no such effect associated with the tax deductibility of the coupon interest payments on debt. The more volatile interest rates and bond prices are, the more valuable the tax‐timing option and the larger the favorable impact of debt on shareholder wealth.

Corporate Dividends and Seasoned Equity Issues: An Empirical Investigation

Published: 03/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb03983.x

CLAUDIO F. LODERER, DAVID C. MAUER

This paper investigates whether managers rely on dividends to obtain a higher price in a stock offering and whether the stock price reaction to dividend and offering announcements justifies such a coordination. The evidence does not support either conjecture. Issuing firms are not more likely to pay or increase dividends than nonissuing forms. Moreover, there is little evidence that firms time stock offering announcements right after dividend declarations to benefit from the attendant information disclosure. The analysis of dividend and stock offering announcement effects suggests few if any benefits from linking dividend and stock offering announcements.

Interactions of Corporate Financing and Investment Decisions: A Dynamic Framework

Published: 09/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb02453.x

DAVID C. MAUER, ALEXANDER J. TRIANTIS

This article analyzes the interaction between a firm's dynamic investment, operating, and financing decisions in a model with operating adjustment and recapitalization costs. Using numerical analysis, we solve the model for cases that highlight interaction effects. We find that higher production flexibility (due to lower costs of shutting down and reopening a production facility) enhances the firm's debt capacity, thereby increasing the net tax shield value of debt financing. While higher financial flexibility (resulting from lower recapitalization costs) has a similar effect, production flexibility and financial flexibility are, to some extent, substitutes. We find that the impact of debt financing on the firm's investment and operating decisions is economically insignificant.

Bondholder Wealth Effects in Mergers and Acquisitions: New Evidence from the 1980s and 1990s

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00628.x

Matthew T. Billett, Tao‐Hsien Dolly King, David C. Mauer

We examine the wealth effects of mergers and acquisitions on target and acquiring firm bondholders in the 1980s and 1990s. Consistent with a coinsurance effect, below investment grade target bonds earn significantly positive announcement period returns. By contrast, acquiring firm bonds earn negative announcement period returns. Additionally, target bonds have significantly larger returns when the target's rating is below the acquirer's, when the combination is anticipated to decrease target risk or leverage, and when the target's maturity is shorter than the acquirer's. Finally, we find that target and acquirer announcement period bond returns are significantly larger in the 1990s.

Growth Opportunities and the Choice of Leverage, Debt Maturity, and Covenants

Published: 03/20/2007   |   DOI: 10.1111/j.1540-6261.2007.01221.x

MATTHEW T. BILLETT, TAO‐HSIEN DOLLY KING, DAVID C. MAUER

We investigate the effect of growth opportunities in a firm's investment opportunity set on its joint choice of leverage, debt maturity, and covenants. Using a database that contains detailed debt covenant information, we provide large‐sample evidence of the incidence of covenants in public debt and construct firm‐level indices of bondholder covenant protection. We find that covenant protection is increasing in growth opportunities, debt maturity, and leverage. We also document that the negative relation between leverage and growth opportunities is significantly attenuated by covenant protection, suggesting that covenants can mitigate the agency costs of debt for high growth firms.

Subprime Mortgage Defaults and Credit Default Swaps

Published: 10/27/2014   |   DOI: 10.1111/jofi.12221

ERIC ARENTSEN, DAVID C. MAUER, BRIAN ROSENLUND, HAROLD H. ZHANG, FENG ZHAO

We offer the first empirical evidence on the adverse effect of credit default swap (CDS) coverage on subprime mortgage defaults. Using a large database of privately securitized mortgages, we find that higher defaults concentrate in mortgage pools with concurrent CDS coverage, and within these pools the loans originated after or shortly before the start of CDS coverage have an even higher delinquency rate. The results are robust across zip code and origination quarter cohorts. Overall, we show that CDS coverage helped drive higher mortgage defaults during the financial crisis.