International Capital Structure Equilibrium

Authors

  • JAMES E. HODDER,

  • LEMMA W. SENBET

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    • Hodder is from Stanford University, and Senbet is from the College of Business and Management, University of Maryland. We gratefully acknowledge helpful comments on previous drafts of the paper by René Stulz, Robert Dammon, Eugene Flood, Dennis Logue, Steven Raymar, Robert Taggart, Adrian Tschoegl, anonymous referees for this Journal, and seminar participants at Osaka, Stanford, Wisconsin, and Illinois. Previous versions of this paper were also presented at the annual meetings of the American, Western, and European Finance Associations.


ABSTRACT

This paper develops a theory of capital structure in an international setting with corporate and personal taxes. We generalize the Miller analysis to an international equilibrium characterized by differential international taxation and inflation in otherwise perfect international capital markets. Our analysis highlights the key role that corporate tax arbitrage plays in generating an international capital structure equilibrium, and we set forth a number of mechanisms for tax arbitrage transactions. We close the paper by outlining some implications of our analysis for national differences in capital structure, the International Fisher Effect, and international tax effects on yield differentials.

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