Do Personal Taxes Affect Corporate Financing Decisions?

Journal of Public Economics

Posted: 9 Dec 1998

See all articles by John R. Graham

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

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This paper investigates the degree to which personal taxes affect corporate financing decisions. The traditional view is that interest deductibility encourages firms to use debt financing; however, some argue that the personal tax disadvantage to interest negates the corporate tax advantage at the margin (e.g., Miller, 1977). The Miller argument implies that firms should not have tax-driven optimal capital structures.

Cross-sectional regressions that control for personal taxes are performed. The results indicate that debt usage is positively correlated with tax rates in each year 1980-1994, with significant coefficients in almost every year. A specification that adjusts tax benefits for the personal tax penalty statistically dominates a specification that does not. The positive (negative) effect of corporate (personal) taxes on debt usage is distinctly identified.

Overall, the results indicate that personal taxes offset but do not negate the corporate tax advantage to debt. The evidence is consistent with firms having tax-driven optimal capital structures.

Note: This is a description of the paper and not the actual abstract.

JEL Classification: G32, H20, H25

Suggested Citation

Graham, John Robert, Do Personal Taxes Affect Corporate Financing Decisions?. Journal of Public Economics, Available at SSRN:

John Robert Graham (Contact Author)

Duke University ( email )

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United States
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National Bureau of Economic Research (NBER)

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