Taxes, Capital Structure Choices, and Equity Value

50 Pages Posted: 12 Mar 2014 Last revised: 26 Feb 2017

See all articles by Mara Faccio

Mara Faccio

Purdue University - Krannert School of Management; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Jin Xu

Virginia Tech - Pamplin College of Business

Date Written: November 30, 2016

Abstract

We use a multitude of tax reforms across OECD countries as natural experiments to estimate the market value of the tax benefits of debt financing. We report time-series evidence that tax reforms are followed by large changes in the value of corporate equity. However, the impact of tax reforms is greatly mitigated by the presence of leverage. The value of debt tax savings is greater among top tax payers, highly profitable firms, and in countries where tax laws are more strongly enforced. Importantly, the value of debt tax savings is in line with the benchmark implied by a traditional approach.

Keywords: Taxes, Capital structure choices, Equity value

JEL Classification: G3, G32, F3

Suggested Citation

Faccio, Mara and Xu, Jin, Taxes, Capital Structure Choices, and Equity Value (November 30, 2016). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2407470 or http://dx.doi.org/10.2139/ssrn.2407470

Mara Faccio

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Jin Xu (Contact Author)

Virginia Tech - Pamplin College of Business ( email )

Department of Finance
880 West Campus Dr
Blacksburg, VA 24061
United States

HOME PAGE: http://finance.pamplin.vt.edu/directory/xu.html

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