Additionally, AT1 is a way of raising non-dilutive capital which would be the case if common equity were issued, and in jurisdictions where debt issuance benefits from tax shields
(Asia and Europe), it can be classified as long-term debt.
Chief Financial Officer, Steve Theobald, commented, As a company with no foreign subsidiaries and few opportunities for tax shields
, the reduction in the corporate tax rate due to the Tax Cuts and Jobs Act will have an immediate positive impact on our earnings and cash flow going forward.
Trade-off theory that stemmed from the original Modigliani-Miller (1958) irrelevance theorem assumes that the firm trades off the cost and benefit associated debt and equity financing and finds an optimal capital structure while taking into consideration the advantages of tax shields
, agency costs and bankruptcy costs.
Myers (1977) developed static trade-off theory, and asserted that "a firm attempts to balance the value of interest tax shields
against bankruptcy cost ".
The most important are size, profitability, growth, risk (expressed in the volatility of the operating performance), asset structure (expressed in the level of the tangibility of assets) and non-debt tax shields
Further work by Miller (1977) introduces corporate taxes, personal taxes on capital gains, and personal taxes on interest incomes, while DeAngelo and Masulis (1980) introduces non-interest, tax exempted expenses like depreciation and investment credit taxes as non-debt tax shields
Other control variables include size, growth, profitability, tangibility, age, earnings variability, debt service capacity, dividend payout ratio, non-debt tax shields
, degree of operating leverage, price-earnings ratio, promoter shareholdings, tax rate and uniqueness.
Capital structure determinants are except tax shields
, profitability, size, assets tangibility, growth, signaling and cost of financial distress.
The transaction is structured as an acquisition of the stock of LFM with a tax election that allows Entercom to receive a step-up in the tax basis of the station tangible and intangible assets providing additional future tax shields
and enhancing future free cash flow.
The empirical studies from US firms, such as that of Harris and Raviv , seem to suggest that "leverage increases with fixed assets, non-debt tax shields
, investment opportunities and firm size and decreases with volatility, advertising expenditure, the probability of bankruptcy, profitability and uniqueness of the product.
DeAngelo and Masulis (1980) explain that non-debt tax shields
work as a substitute for the tax benefits for debts.
As this study has wider applications for examining the functional relationship between the level of investment --related tax shields
and the levels of debt-related tax shields
at the firm level, the authors have also undertaken an empirical study of 166 firms from 20 four-digit SIC code industries and : Data-for the 1973-75 and 1983-85 time periods--used in the analysis were drawn from the annual COMPUSTAT industrial lapes.