As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from Exogenous State Tax Changes
75 Pages Posted: 28 Jul 2012 Last revised: 25 Nov 2024
There are 4 versions of this paper
As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from State Tax Changes
As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from State Tax Changes
As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from State Tax Changes
Date Written: July 2012
Abstract
We use a natural experiment in the form of 121 staggered changes in corporate income tax rates across U.S. states to show that tax considerations are a first-order determinant of firms' capital structure choices. Over the period 1990-2011, firms increase long-term leverage by 104 basis points on average (or $32.5 million in extra debt) in response to an average tax increase of 131 basis points. Contrary to static trade-off theory, the tax sensitivity of leverage is asymmetric: firms do not reduce leverage in response to tax cuts. Using treatment reversals, we find this to be true even within-firm: tax increases that are later reversed nonetheless lead to permanent increases in a firm's leverage - an unexpected and novel form of hysteresis. Our findings are robust to various confounds such as unobserved variation in local business conditions, union power, or unemployment risk. Treatment effects are heterogeneous and confirm the tax channel: tax sensitivity is greater among profitable and investment-grade firms which respectively have a greater marginal tax benefit and lower marginal cost of issuing debt.
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
On the Evolution of the Firm Size Distribution: Facts and Theory
By Luis M. B. Cabral and José Mata
-
The Information Technology Revolution and the Stock Market: Evidence
By Bart Hobijn and Boyan Jovanovic
-
Aggregate Consequences of Limited Contract Enforceability
By Thomas F. Cooley, Ramon Marimon, ...
-
Aggregate Consequences of Limited Contract Enforceability
By Thomas F. Cooley, Ramon Marimon, ...
-
Aggregate Consequences of Limited Contract Enforceability
By Thomas F. Cooley, Vincenzo Quadrini, ...
-
The it Revolution and the Stock Market
By Jeremy Greenwood and Boyan Jovanovic
-
The it Revolution and the Stock Market
By Jeremy Greenwood and Boyan Jovanovic