Pouring oil on fire: interest deductibility and corporate debt

Pietro Dallari, Nicolas End, Fedor Miryugin, Alexander Tieman and Seyed Reza Yousefi ()
Additional contact information
Pietro Dallari: International Monetary Fund
Fedor Miryugin: International Monetary Fund
Seyed Reza Yousefi: International Monetary Fund

International Tax and Public Finance, 2020, vol. 27, issue 6, No 6, 1520-1556

Abstract: 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 up to a quarter of total leverage. These findings support the tradeoff theory of capital structure. We furthermore explore what firm traits affect these results, documenting how 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.

Keywords: Leverage; Debt Bias; Tax Policy; Corporate Income Tax; SMEs; Micro data (search for similar items in EconPapers)
JEL-codes: D22 G32 H25 H32 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://link.springer.com/10.1007/s10797-020-09604-7 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Pouring Oil on Fire: Interest Deductibility and Corporate Debt (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:itaxpf:v:27:y:2020:i:6:d:10.1007_s10797-020-09604-7

Ordering information: This journal article can be ordered from
http://www.springer. ... ce/journal/10797/PS2

DOI: 10.1007/s10797-020-09604-7

Access Statistics for this article

International Tax and Public Finance is currently edited by Ronald B. Davies and Kimberly Scharf

More articles in International Tax and Public Finance from Springer, International Institute of Public Finance Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().