Corporate Tax Incentives and Capital Structure: Empirical Evidence from UK Tax Returns

Michael Devereux, Giorgia Maffini and Jing Xing

No 76, Working Papers from "Carlo F. Dondena" Centre for Research on Social Dynamics (DONDENA), Università Commerciale Luigi Bocconi

Abstract: This paper examines how companies’ capital structure is affected by the corporate income tax system. Our analysis employs confidential company-level corporation tax return data in the UK. Our main identification strategy is based on variation in companies␣ marginal tax rates due to the existence of kinks in the corporate tax rate schedule. Using a dynamic adjustment model of capital structure, we find a positive and substantial long-run tax effect on companies' financial leverage. We show that there are considerable discrepancies between estimates of taxable profits reported in tax return data and in financial statements and that the estimated tax effect on capital structure using financial statements is likely to be biased downward. We find that companies adjust their capital structures gradually in response to changes in the marginal tax rate. Moreover, we find that the external leverage of domestic stand-alone companies and of multinational companies responds strongly to corporate tax incentives.

Keywords: Corporate taxation; capital structure; tax returns. (search for similar items in EconPapers)
Pages: 54 pages
Date: 2015-06
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-pub
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Citations: View citations in EconPapers (3)

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Working Paper: Corporate tax incentives and capital structure: empirical evidence from UK tax returns (2015)
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