Corporate Debt and Taxes

Michelle Hanlon () and Shane Heitzman
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Michelle Hanlon: Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts, USA
Shane Heitzman: Marshall School of Business, University of Southern California, Los Angeles, California, USA

Annual Review of Financial Economics, 2022, vol. 14, issue 1, 509-534

Abstract: We provide updates to and perspectives on the enduring topic of debt and taxes. The recent decade brought us new empirical strategies, accounting rules, and tax laws. We discuss how these and other developments change our understanding of leverage and taxes. Overall, tax incentives still do not seem to have a consistent, first-order effect on corporate capital structure. This presents a puzzle as governments increasingly limit interest deductibility, citing its contribution to overleverage and distress. We discuss critical empirical challenges such as measurement, highlight issues surrounding assumptions about tax rates and real-world financing decisions, and offer insights and direction for future research. We conclude that rather than asking if taxes are a first-order driver of corporate capital structure, a more productive goal is a greater understanding of when tax incentives yield material effects on corporate capital structure.

Keywords: capital structure; corporate tax; financial policy; leverage; tax policy (search for similar items in EconPapers)
JEL-codes: G32 G38 H25 H32 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1146/annurev-financial-101221-103806

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