(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

MacKinlay, Andrew, (How) Do Taxes Affect Capital Structure? (February 5, 2015). Available at SSRN: https://ssrn.com/abstract=2022518 or http://dx.doi.org/10.2139/ssrn.2022518

Andrew MacKinlay (Contact Author)

Virginia Tech ( email )

1016 Pamplin Hall (0221)
880 West Campus Drive
Blacksburg, VA 24060-0221
United States

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