Capital Structure Choice and Company Taxation: A Meta-Study
48 Pages Posted: 13 Mar 2011
Date Written: March 1, 2011
This paper provides a comprehensive quantitative review of the empirical literature on the impact of taxation on corporate debt financing. Synthesizing the evidence from over 1,000 primary estimates extracted out of 46 studies, we find that this impact is indeed quite substantial. Our results suggest that, in particular, the tax rate proxy used for identification determines the outcome of primary analyses. More refined measures like the simulated marginal tax rate suggested by Graham (1996, 1999) avoid a significant downward bias in estimates for the debt response to tax. Moreover, we find that debt characteristics, the econometric specification, the set of control-variables, and publication selection in primary studies exert significant influence on estimated tax effects. Accounting for all potential misspecification biases by means of meta-regression analyses, we predict a marginal tax effect on the debt ratio of 0.3.
Keywords: Capital Structure, Corporate Income Tax, Meta-Analysis
JEL Classification: G30, H32, F23
Suggested Citation: Suggested Citation