Corporate Tax Avoidance and Debt Policy

42 Pages Posted: 11 Nov 2013

See all articles by Ramesh P. Rao

Ramesh P. Rao

Oklahoma State University - Stillwater - Spears School of Business - Department of Finance

T. Robert Yu

University of Wisconsin - Whitewater

Date Written: November 06, 2013

Abstract

This paper examines the relation between corporate tax avoidance and debt policy using a large sample of firms from 1988 to 2006. We use modified measures of book-tax difference and long-run cash effective tax rate to proxy for tax avoidance. Using both measures we find consistent evidence that tax avoidance is negatively associated with leverage ratio. Further, we find that the substitution of non-debt tax avoidance for debt dissipates for very large, highly profitable firms, and firms with higher credit rating. Our findings are robust to alternative measures of leverage. Consistent with the debt substitution hypothesis, we offer new evidence to show that tax is an important factor in corporate capital structure decisions.

Keywords: Tax avoidance; capital structure; non-debt tax shields; leverage; taxes

JEL Classification: M41, H25, G32

Suggested Citation

Rao, Ramesh P. and Yu, Tong, Corporate Tax Avoidance and Debt Policy (November 06, 2013). Available at SSRN: https://ssrn.com/abstract=2352646 or http://dx.doi.org/10.2139/ssrn.2352646

Ramesh P. Rao

Oklahoma State University - Stillwater - Spears School of Business - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States
405-744-1385 (Phone)
405-744-5180 (Fax)

Tong Yu (Contact Author)

University of Wisconsin - Whitewater ( email )

Department of Accounting
College of Business and Economics
Whitewater, WI 53190
United States
262-472-6965 (Phone)

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