(How) Do Taxes Affect Capital Structure?
70 Pages Posted: 15 Mar 2012 Last revised: 7 Feb 2015
Date Written: February 5, 2015
Ignoring the cost of debt in firms’ financing decisions leads to an overstatement of the effect of taxes. Separately identifying the impact of the cost of debt, I find the effect of taxes on firms’ overall debt usage to be insignificant. Rather than influencing the total debt in firms’ capital structure, taxes affect the relative composition of debt. Firms shift from private intermediated debt to public bond debt in response to increases in marginal tax rates. Firms’ debt policy is most sensitive to tax rates in high interest rate environments.
Keywords: Capital Structure, Debt Structure, Cost of Debt, Taxes
JEL Classification: G32, H25
Suggested Citation: Suggested Citation