Pouring Oil on Fire: Interest Deductibility and Corporate Debt

Pietro Dallari, Nicolas End, Fedor Miryugin, Alexander Tieman and Seyed Reza Yousefi

No 2018/257, IMF Working Papers from International Monetary Fund

Abstract: This paper investigates the role of tax incentives towards debt finance in the buildup of leverage in the nonfinancial corporate (NFC) sector, using a large firm-level dataset. We find that so-called debt bias is a significant driver of leverage, for both small and medium-sized enterprises and larger firms, with its effect accounting for about a quarter of leverage. The strength of this effect differs with firm size, the availability of collateral, income and income volatility, cash flow, and capital intensity. We conclude that leveling the playing field between debt and equity finance through tax policy reform would decrease NFC leverage, reducing economic risks posited by leverage.

Keywords: WP; firm; debt; SME; Leverage; Debt Bias; Tax Policy; Corporate Income Tax; SMEs; Micro data; leverage decision; coefficient estimate; incurred debt; debt firm; debt contract; leverage ratio; estimates of debt bias; long-term debt; strength of debt bias; effect of debt bias; bias coefficient estimate; Capital productivity; Financial statements; Currencies; Europe; Global; interest deductibility; corporate debt; quantile regression; copyright Page; Oil (search for similar items in EconPapers)
Pages: 42
Date: 2018-12-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: Pouring oil on fire: interest deductibility and corporate debt (2020)
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