Taxes and Corporate Policies: Evidence From a Quasi Natural Experiment

54 Pages Posted: 13 Jun 2012 Last revised: 20 Feb 2013

See all articles by Craig Doidge

Craig Doidge

University of Toronto - Rotman School of Management

I. J. Alexander Dyck

University of Toronto - Rotman School of Management

Date Written: February 4, 2013

Abstract

We document important interactions between tax incentives and corporate policies using a “quasi natural experiment” provided by a surprise announcement that imposed corporate taxes on a group of Canadian publicly-traded firms. The announcement caused a dramatic decrease in value although prospective tax shields partially offset the losses, adding 4.6% to firm value. In response to changing tax incentives, firms subsequently adjusted their corporate policies. They increased leverage to gain interest tax shields and reversed changes in other policies that had been made to capitalize on tax benefits. The evidence supports the view that taxes are important for corporate decision making.

Keywords: taxes, corporate policies

JEL Classification: G14, G31, G32, G34, G35

Suggested Citation

Doidge, Craig and Dyck, I.J. Alexander, Taxes and Corporate Policies: Evidence From a Quasi Natural Experiment (February 4, 2013). Journal of Finance, Forthcoming, Rotman School of Management Working Paper No. 2083818, Available at SSRN: https://ssrn.com/abstract=2083818 or http://dx.doi.org/10.2139/ssrn.2083818

Craig Doidge (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-946-8598 (Phone)

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Doidge

I.J. Alexander Dyck

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S 3E6
Canada
416-946-0819 (Phone)

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