International College of Economics and Finance

Research seminar by Giovanna Nicodano ( University of Torino): «Intercorporate guarantees, leverage and taxes»

On Tuesday, October 25 at 4.30 pm International College of Economics and Finance held Research seminar.
Venue: Pokrovski Bulvar, 11, Room Zh-822
Speaker: Giovanna Nicodano (University of Torino)
Theme: «Intercorporate guarantees, leverage and taxes», joint with Elisa Luciano, University of Turin and Collegio Carlo Alberto

Abstact: This paper characterizes optimal intercorporate guarantees, under the classical trade-off between bankruptcy costs and taxation. Conditional guarantees, allowing the provider to maintain limited liability vis-à-vis the beneficiary, maximize joint value. They indeed achieve the highest tax savings net of default costs. We provide conditions ensuring that - at the optimum - guarantees increase total debt, which bears mostly on the beneficiary. This difference in optimal leverage between the provider and the beneficiary explains why optimal conditional guarantees generate value independently of cash flow correlation are unilateral rather than mutual, at least for moderate default costs dominate the  unconditional ones, that are embedded in mergers, at least when firms have high cash-flow correlation. We also endogenize the choice of the guarantor, showing that it has higher proportional bankruptcy costs and lower tax rates.

Short bio: Giovanna Nicodano is Professor of Financial Economics of the University of Turin and Fellow of the Collegio Carlo Alberto. She holds a PhD from Princeton University. Her research is concentrated on the fields of corporate finance, portfolio choice and asset pricing. She has published in top economics and finance journals, among others in The Journal of Finance, Journal of Banking and Finance, European Economic Review, Review of Finance, Real Estate Economics.

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