Taxes and Corporate Debt Policy in Canada: An Empirical Investigation

Pauline Shum

Canadian Journal of Economics, 1996, vol. 29, issue 3, 556-72

Abstract: This paper explores the implications of asymmetric corporate taxes for firms' debt policy. The focus is on the effects of two dynamic tax provisions, loss carry-forward and loss carry-back, on net debt issues. An effective tax variable is first estimated using a Tobit framework, accounting for the fact that firms' losses for tax purposes are censored. This effective tax variable and other explanatory factors are employed to explain net debt issues. Heteroskedasticity caused by the 'firm size effect' is also corrected. Using a panel of 128 firms between 1979 and 1989, this paper finds that corporate taxes have significant effects on firms' debt policy.

Date: 1996
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