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As certain as debt and taxes: Estimating the tax sensitivity of leverage from state tax changes

Florian Heider and Alexander Ljungqvist (alexander.ljungqvist@hhs.se)

Journal of Financial Economics, 2015, vol. 118, issue 3, 684-712

Abstract: Using staggered corporate income tax changes across U.S. states, we show that taxes have a first-order effect on capital structure. Firms increase leverage by around 40 basis points for every percentage-point tax increase. Consistent with dynamic tradeoff theory, the effect is asymmetric: leverage does not respond to tax cuts. This is true even within-firm: tax increases that are later reversed nonetheless lead to permanent leverage increases. The treatment effects are heterogeneous and confirm the tax channel: tax sensitivity is greater among profitable and investment-grade firms which respectively have a greater marginal tax benefit and lower marginal cost of issuing debt.

Keywords: Capital structure; Taxes; Tradeoff theory; Dynamic capital structure models; Natural experiments (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations: View citations in EconPapers (171)

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Related works:
Chapter: As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from State Tax Changes (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:118:y:2015:i:3:p:684-712

DOI: 10.1016/j.jfineco.2015.01.004

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