The Journal of Finance

DISCUSSION

Published: 05/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb02277.x

CLIFFORD W. SMITH

Tax Incentives to Hedge

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00187

John R. Graham, Clifford W. Smith

For corporations facing tax‐function convexity, hedging lowers expected tax liabilities, thereby providing an incentive to hedge. We use simulation methods to investigate convexity induced by tax‐code provisions. On average, the tax function is convex (although in approximately 25 percent of cases it is concave). Carrybacks and carryforwards increase the range of income with incentives to hedge; other tax‐code provisions have minor impacts. Among firms facing convex tax functions, average tax savings from a five percent reduction in the volatility of taxable income are about 5.4 percent of expected tax liabilities; in extreme cases, these savings exceed 40 percent.

Death and Taxes: The Market for Flower Bonds

Published: 07/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb04578.x

DAVID MAYERS, CLIFFORD W. SMITH

Certain U.S. Government securities, known as flower bonds, can be redeemed at par plus accrued interest for the purpose of paying estate taxes, if held at the time of death. Thus, a flower bond, selling at a discount, is like a straight bond plus a life insurance policy. An equilibrium derived from a rational flower bond pricing model implies the existence of clienteles: individuals with the highest death probabilities hold the deepest discount flower bonds. The empirical implication, that bonds with the deepest discount should be redeemed at the fastest rate, is tested and the results support the proposition.

Determinants of Corporate Leasing Policy

Published: 07/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb05016.x

CLIFFORD W. SMITH, L. MACDONALD WAKEMAN

The existing finance literature assumes the real operating cash flows from leasing or owning are invariant to the ownership of the asset and focuses on tax‐related incentives for corporate leasing policy. Our analysis suggests that taxes are important in identifying potential lessees and lessors, but are less important in identifying the specific assets leased. We provide a unified analysis of the various incentives affecting the lease‐versus‐purchase decision. We then show how these incentives explain the use of contractual provisions such as maintenance clauses, deposits, options to purchase the asset, and metering.

Bankruptcy, Secured Debt, and Optimal Capital Structure: Comment

Published: 03/01/1979   |   DOI: 10.1111/j.1540-6261.1979.tb02085.x

CLIFFORD W. SMITH, JEROLD B. WARNER

Accounts Receivable Management Policy: Theory and Evidence

Published: 03/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb03982.x

SHEHZAD L. MIAN, CLIFFORD W. SMITH

This paper develops and tests hypotheses that explain the choice of accounts receivable management policies. The tests focus on both cross‐sectional explanations of policy‐choice determinants, as well as incentives to establish captives. We find size, concentration, and credit standing of the firm's traded debt and commercial paper are each important in explaining the use of factoring, accounts receivable secured debt, captive finance subsidiaries, and general corporate credit. We also offer evidence that captive formation allows more flexible financial contracting. However, we find no evidence that captive formation expropriates bondholder wealth.

The Priority Structure of Corporate Liabilities

Published: 07/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04041.x

MICHAEL J. BARCLAY, CLIFFORD W. SMITH

Most discussions of corporate capital structure effectively assume that all debt is the same. Yet debt differs by maturity, covenant restrictions, conversion rights, call provisions, and priority. Here, we examine priority structure across a sample of 4995 COMPUSTAT industrial firms from 1981 to 1991. We analyze the variation in the use of capital leases, secured debt, ordinary debt, subordinated debt, and preferred stock both as a fraction of the firm's market value and as a fraction of total fixed claims. Our evidence provides consistent support for contracting cost hypotheses, mixed support for tax hypotheses, and little support for the signaling hypothesis.

The Maturity Structure of Corporate Debt

Published: 06/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04797.x

MICHAEL J. BARCLAY, CLIFFORD W. SMITH

We provide an empirical examination of the determinants of corporate debt maturity. Our evidence offers strong support for the contracting‐cost hypothesis. Firms that have few growth options, are large, or are regulated have more long‐term debt in their capital structure. We find little evidence that firms use the maturity structure of their debt to signal information to the market. The evidence is consistent, however, with the hypothesis that firms with larger information asymmetries issue more short‐term debt. We find no evidence that taxes affect debt maturity.

A TRANSACTIONS COST APPROACH TO THE THEORY OF FINANCIAL INTERMEDIATION

Published: 05/01/1976   |   DOI: 10.1111/j.1540-6261.1976.tb01882.x

Myron Scholes, George J. Benston, Clifford W. Smith

On the Determinants of Corporate Hedging

Published: 03/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04709.x

DEANA R. NANCE, CLIFFORD W. SMITH, CHARLES W. SMITHSON

Finance theory indicates that hedging increases firm value by reducing expected taxes, expected costs of financial distress, or other agency costs. This paper provides evidence on these hypotheses using survey data on firm's use of forwards, futures, swaps, and options combined with COMPUTSTAT data on firm characteristics. Of 169 firms in the sample, 104 firms use hedging instruments in 1986. The data suggest that firms which hedge face more convex tax functions, have less coverage of fixed claims, are larger, have more growth options in their investment opportunity set, and employ fewer hedging substitutes.