Debt and Taxes: Evidence from the Real Estate Industry

48 Pages Posted: 7 Apr 2012

See all articles by Michael Barclay

Michael Barclay

Deceased

Shane Heitzman

University of Southern California - Marshall School of Business

Clifford W. Smith

Simon Graduate School of Business, University of Rochester

Date Written: April 6, 2012

Abstract

Compelling empirical evidence documenting a material effect of corporate taxes on leverage decisions is limited, in part because of difficulties in constructing an effective proxy for the firm’s tax benefit of debt. We examine leverage decisions across taxable and nontaxable real estate firms — firms for which we can measure the relative tax benefit of debt with little error. The tax hypothesis implies that for firms with similar asset portfolios, taxable firms should have more debt than their nontaxable counterparts. We find that leverage ratios of taxable real estate firms are about 5% higher than their nontaxable counterparts, but this estimate is only one-third what would be expected given recent evidence using simulated marginal tax rates.

Keywords: Capital structure, taxes, marginal tax rates, organizational form

JEL Classification: G32, H25, M41

Suggested Citation

Barclay, Michael and Heitzman, Shane and Smith, Clifford W., Debt and Taxes: Evidence from the Real Estate Industry (April 6, 2012). Simon School Working Paper No. FR 12-08. Available at SSRN: https://ssrn.com/abstract=2035650 or http://dx.doi.org/10.2139/ssrn.2035650

Michael Barclay

Deceased

N/A

Shane Heitzman (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Clifford W. Smith

Simon Graduate School of Business, University of Rochester ( email )

Carol Simon Hall 3-202C
Rochester, NY 14627
United States
585-275-3217 (Phone)
585-442-6323 (Fax)

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