Abstract

http://ssrn.com/abstract=2024200
 
 

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As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from State Tax Changes


Florian Heider


European Central Bank (ECB)

Alexander Ljungqvist


New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

August 6, 2014

AFA 2013 San Diego Meetings Paper

Abstract:     
We use a natural experiment in the form of 121 staggered changes in corporate income tax rates across U.S. states to show that tax considerations are a first-order determinant of firms’ capital structure choices. Over the period 1990-2011, firms increase long-term leverage by around 40 basis points for every percentage point increase in the tax rate. Consistent with dynamic tradeoff theory, the tax sensitivity of leverage is asymmetric: firms do not reduce leverage in response to tax cuts. Using treatment reversals, we find this to be true even within-firm: tax increases that are later reversed nonetheless lead to permanent increases in a firm’s leverage. Our findings are robust to various confounds such as unobserved variation in local business conditions, union power, or unemployment risk. 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.

Number of Pages in PDF File: 74

Keywords: Capital structure, debt policy, leverage, leverage dynamics, taxes, tradeoff theory, dynamic capital structure models, natural experiments

JEL Classification: G32

working papers series


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Date posted: March 18, 2012 ; Last revised: August 6, 2014

Suggested Citation

Heider, Florian and Ljungqvist, Alexander, As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from State Tax Changes (August 6, 2014). AFA 2013 San Diego Meetings Paper. Available at SSRN: http://ssrn.com/abstract=2024200 or http://dx.doi.org/10.2139/ssrn.2024200

Contact Information

Florian Heider
European Central Bank (ECB) ( email )
Kaiserstrasse 29
Frankfurt am Main, D-60311
Germany
Alexander Ljungqvist (Contact Author)
New York University (NYU) - Department of Finance ( email )
Stern School of Business
44 West 4th Street, Suite 9-160
New York, NY 10012-1126
United States
212-998-0304 (Phone)
212-995-4220 (Fax)
HOME PAGE: http://pages.stern.nyu.edu/~aljungqv
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Research Institute of Industrial Economics (IFN) ( email )
Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden
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