Debt and Corporate Tax Evasion
20 Pages Posted: 14 Feb 2009 Last revised: 7 Feb 2012
Date Written: January 30, 2012
Shareholder wealth may be maximized by borrowing, as it is tax preferred, or by under reporting firm profits; both shield income from taxation, legally in the case of the former. But does the utilization of one shield crowd out the use of the other? More specifically, does tax evasion lead to lower leverage, as the empirical literature suggests, or is it the other way around with highly leveraged firms cheating less? Using a unique random sample of small corporations thoroughly audited, the empirical results show that tax evasion declines with firm leverage; there is little support for the findings in the literature.
Keywords: Taxes, Corporate Tax Evasion, Debt
JEL Classification: H25, H26, G32
Suggested Citation: Suggested Citation