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Taxes Depress Corporate Borrowing: Evidence from Private Firms
[working paper]
Corporate Editor
Institut für Höhere Studien (IHS), Wien
Abstract We re-examine the relation between taxes and corporate leverage, using variation in state corporate income tax rates. In contrast with prior research, we document that corporate leverage increases following tax cuts for both privately held and publicly listed firms. We use an estimated dynamic equili... view more
We re-examine the relation between taxes and corporate leverage, using variation in state corporate income tax rates. In contrast with prior research, we document that corporate leverage increases following tax cuts for both privately held and publicly listed firms. We use an estimated dynamic equilibrium model to show that tax cuts result in lower default spreads and more distant default thresholds. These effects outweigh the loss of benefits from the interest tax deduction and lead to higher leverage, especially for privately held firms. Overall, debt tax shields appear to be a secondary capital structure consideration.... view less
Keywords
taxation; indebtedness; corporate tax; reducing taxes; private enterprise; enterprise
Classification
Public Finance
National Economy
Document language
English
Publication Year
2021
City
Wien
Page/Pages
49 p.
Series
IHS Working Paper, 32
Status
Published Version; reviewed