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Taxes and Leverage at Multinational Corporations

Western Finance Association, 2014

NBER Summer Institute, Corporate Finance Workshop, 2014

Robert H. Smith School Research Paper

38 Pages Posted: 12 Nov 2013 Last revised: 17 Jul 2014

Michael W. Faulkender

University of Maryland - Robert H. Smith School of Business

Jason M. Smith

Utah State University

Date Written: May 1, 2014

Abstract

Empirical research has struggled to document the variation in recent corporate capital structures as arising from variation in estimated corporate income tax rates. We argue that in previous studies, both the tax rates being applied to multinational corporations and the taxable income earned has been miss-measured, a result of firms operating in many foreign countries. Using a sample of multinational firms collected in the Bureau of Economic Analysis’ annual survey combined with each firm’s respective income and country specific tax rate, we revisit this tax-leverage puzzle. Empirically we find that firms do have higher leverage ratios and lower interest coverage ratios when they operate in countries with higher tax rates, as theory would suggest. Our results demonstrate that the primary benefit of leverage under the trade-off theory of capital structure continues to have empirical support.

Keywords: Capital Structure, Taxes

JEL Classification: G30

Suggested Citation

Faulkender, Michael W. and Smith, Jason M., Taxes and Leverage at Multinational Corporations (May 1, 2014). Western Finance Association, 2014; NBER Summer Institute, Corporate Finance Workshop, 2014; Robert H. Smith School Research Paper. Available at SSRN: https://ssrn.com/abstract=2353042 or http://dx.doi.org/10.2139/ssrn.2353042

Michael W. Faulkender

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

Jason M. Smith (Contact Author)

Utah State University ( email )

Logan, UT 84322
United States

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