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

See all articles by Yoojin Lee

Yoojin Lee

California State University, Long Beach

Terry J. Shevlin

University of California-Irvine; University of California-Irvine

Aruhn Venkat

McCombs School of Business, University of Texas at Austin

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

Lee, Yoojin and Shevlin, Terry J. and Shevlin, Terry J. and Venkat, Aruhn, The Effect of Tax Avoidance on Capital Structure Choices (January 21, 2022). The Journal of the American Taxation Association, forthcoming. Available at: https://doi.org/10.2308/JATA-19-049, Available at SSRN: https://ssrn.com/abstract=3422616 or http://dx.doi.org/10.2139/ssrn.3422616

Yoojin Lee (Contact Author)

California State University, Long Beach ( email )

1250 Bellflower Blvd
Long Beach, CA 90064
United States

Terry J. Shevlin

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA 92697-3125
United States
949-824-6149 (Phone)

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

Aruhn Venkat

McCombs School of Business, University of Texas at Austin ( email )

2110 Speedway
Austin, TX 78705
United States

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