The tax benefit due to indebtedness in Chilean companies

Authors

  • Carlos Maquieira V. Universidad de Chile
  • Jorge Niño T. Universidad de Chile

Abstract

This article studies the impact of the Chilean tax law on the company capital structure. The study develops a model whose assumptions are very similar to those employed by Modigliani and Miller (1958, 1963) and Miller (1977). In Chile, the debt tax shield is positively related to the cost of capital of the firm and the time horizon of the investors. On the other hand, the payout ratio is negatively related to the debt tax shield. This result might suggest that the dividend policy is not independent of the capital structure decision.

Keywords:

Tax law, Capital structure, Debt tax shield, Cost of capital, Investing time horizon, Chile