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One big issue is debt payments are counted as an expense. So on the margin it’s economically better for companies to have more debt. This leads to more debt th
by mathattack 8y ago
One big issue is debt payments are counted as an expense. So on the margin it’s economically better for companies to have more debt. This leads to more debt than equity for public investors and more debt fueled LBOs. This is all fine and good until the companies get in trouble.
On the bigger picture - is investing in high growth startups a right everyone should have? Value stocks outperform growth over the long haul.
- Areading314 8y ago> One big issue is debt payments are counted as an expense The interest portion only, not principal. This deduction was also limited substantially in the recent tax reform. See: https://rsmus.com/what-we-do/services/tax/lead-tax/broad-new-limitation-on-business-interest-deductions.html https://rsmus.com/what-we-do/services/tax/lead-tax/broad-new...
- mathattack 8y agoYes - just the interest, and they can perpetually roll the principal. So the cost of debt becomes tax deductible versus dividends.
- prostoalex 8y agoAlso, the interest rates for quality corporate debt have been artificially depressed post-QE.
- mathattack 8y agoIndeed! With a long equity runup the risk premium for Corp debt drops too.
- tormeh 8y ago>Value stocks outperform growth over the long haul. I've seen a paper asserting the opposite. I don't remember any names, but I don't think this is something that can just be assumed to be true.