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Corporate Debt, Hybrid Securities, and the Effective Tax Rate


  • Paolo M. Panteghini, University of Brescia, Via San Faustino 74/B, 25122 Brescia, Italy (

  • The author wishes to thank the editor and an anonymous referee for his/her helpful comments. Special thanks go to Roberto Casarin, for his helpful support in MATLAB computations, and Alessandro Bucciol for excellent research assistance.


Effective tax rates (ETRs) are useful tools to make comparisons between different tax systems. However, the existing ETR measures are based on rather simplifying assumptions. In particular, they disregard the existence of different kinds of debt and hybrid securities. In this paper, we use contingent-claim analysis to calculate the ETR. We will therefore deal with both pure debt and two of the most well-known hybrid securities, that is, convertible and reverse convertible bonds. We will show that effective taxation crucially depends on the characteristics of debt and that the existing measures of ETR can be dramatically biased, since they account neither for default risk nor for the ability to convert debt into equity.