Pass-through and C corp outputs under TCJA

Artikel

Corporate finance research focuses on C corps (CCs) neglecting pass-throughs (PTs). We answer this neglect by examining PT outputs for the categories of debt choice, valuation, and leverage gain. In the process, we expand on the nongrowth PT research and supplement the recent CC research on the same outputs. Before the Tax Cuts and Jobs Act (TCJA) became effective in January 2018, PTs had an after-tax valuation advantage over CCs. Under TCJA, we demonstrate this advantage has been reverse. This suggests that, ceteris paribus, a typical PT can now find it advantageous to switch to the CC ownership form. More importantly, we show that nongrowth firm values are comparable to growth firm values unless we assume a rise in growth consistent with projections under TCJA where tax rates are lower. We demonstrate this projected growth increase is the key to make businesses more profitable. Additionally, we show PTs achieve optimal debt-to-firm value ratios (ODVs) well below those for CCs; PTs generally attain slightly higher quality credit ratings at their ODVs compared to CCs; and, PTs have lower leverage gains outputs (in the form of the maximum gain to leverage and the percentage increase in unlevered firm value) compared to CCs.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: International Journal of Financial Studies ; ISSN: 2227-7072 ; Volume: 8 ; Year: 2020 ; Issue: 3 ; Pages: 1-32 ; Basel: MDPI

Classification and Topics

• Classification: Wirtschaft ; Mathematical Methods ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill ; Payout Policy ; Regulation and Business Law: General ; Institutions and Growth
• Subject: pass-through ; valuation ; TCJA ; growth ; tax rate ; debt choice ; leverage gain

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hull, Robert
• Event: Veröffentlichung
• (who): MDPI
• (where): Basel
• (when): 2020

Further information

• DOI: doi:10.3390/ijfs8030046
• Handle: http://hdl.handle.net/10419/257713
• Last update: 10.03.2025, 11:43 AM CET