Taxes Depress Corporate Borrowing: Evidence from Private Firms

Ivanov, Ivan T.; Pettit, Luke and Whited, Toni (March 2021) Taxes Depress Corporate Borrowing: Evidence from Private Firms. IHS Working Paper Series 32, 49 p.

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Abstract or Table of Contents

We re-examine the relation between taxes and corporate leverage, using variation in state corporate income tax rates. In contrast with prior research, we document that corporate leverage increases following tax cuts for both privately held and publicly listed firms. We use an estimated dynamic equilibrium model to show that tax cuts result in lower default spreads and more distant default thresholds. These effects outweigh the loss of benefits from the interest tax deduction and lead to higher leverage, especially for privately held firms. Overall, debt tax shields appear to be a secondary capital structure consideration.

Item Type: IHS Series
Research Units: Macroeconomics and Business Cycles
Status: Published
Date Deposited: 04 Jun 2021 08:01
Last Modified: 04 Jun 2021 08:15
URI: https://irihs.ihs.ac.at/id/eprint/5848

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