Taxes, Capital Structure Choices, and Equity Value
50 Pages Posted: 12 Mar 2014 Last revised: 26 Feb 2017
Date Written: November 30, 2016
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: Suggested Citation