Tax-timing options, leverage, and the choice of corporate form

The tax‐timing options associated with opportunities to trade corporate securities are examined. The availability of such options to both the firm and its securityholders is shown to create incentives for, and thereby to add to the possible explanation of, three empirically observed financial phenomena: (1) the existence of complex corporate capital structures; (2) the presence of debt in those capital structures; and (3) corporate spin‐offs as vehicles to increase the total market value of a firm's assets. A set of symmetrical arguments also offers a reason to expect at least one negative effect on shareholder wealth from mergers of publicly traded companies.