Corporate Debt Maturity Policy and Investor Tax-Timing Options: Theory and Evidence

Abstract

This paper argues that corporate debt maturity policy affects investor tax-timing options to tax-trade corporate securities. In a multiperiod model with interest rate uncertainty, we establish that a long-term debt maturity strategy maximizes investor tax-timing option value. The analysis predicts that the firm lengthens debt maturity as interest rate volatility increases and as the slope of the term structure increases. Empirical analysis supports the model's interest rate volatility prediction.