The Effect of Tax Avoidance on Capital Structure Choices
The Journal of the American Taxation Association, forthcoming. Available at: https://doi.org/10.2308/JATA-19-049
59 Pages Posted: 19 Jul 2019 Last revised: 22 Feb 2022
Date Written: January 21, 2022
Abstract
Existing studies find that tax avoidance affects the cost of debt and equity in different
ways but does not examine the consequences of these associations. This study
examines a direct and important implication of the effect of tax avoidance on the cost of
debt and equity: capital structure choices. Using logit regressions, we find that tax
avoidance is positively associated with the probability of issuing equity rather than
debt. We use mediation (i.e., path) analyses to provide evidence that the effects of
overall tax avoidance and risky tax avoidance on pre-corporate tax cost of equity and
debt partially explain our main effects. For stronger identification, we exploit a plausibly
exogenous 9th Circuit decision to implement a difference-in-differences design.
Finally, we find indirect evidence that managerial focus on GAAP ETR to estimate the
after-tax cost of debt (Graham et al. 2017) partially explaining our main results.
Keywords: tax avoidance, cost of capital, debt and equity financing
JEL Classification: G32, H26, M41
Suggested Citation: Suggested Citation