Corporate Taxes and Capital Structure: A Long-Term Historical Perspective

38 Pages Posted: 18 Aug 2014 Last revised: 2 Mar 2022

See all articles by Francis A. Longstaff

Francis A. Longstaff

University of California, Los Angeles (UCLA) - Finance Area

Ilya A. Strebulaev

Stanford University - Graduate School of Business; National Bureau of Economic Research

Date Written: August 2014

Abstract

We study the relation between leverage and corporate tax rates using an extensive data set constructed from all corporate income tax returns filed with the IRS from 1926 to 2009. This data set includes financial statement data from millions of private and public corporations of all sizes. We show that corporate leverage has increased significantly over the past century. We find strong evidence that changes in corporate leverage are directly related to changes in corporate tax rates for all but the smallest firms. These results are robust to the inclusion of control variables for the costs of financial distress, corporate liquidity, and capital market and macroeconomic conditions. The adjustment of leverage to changes in corporate tax rates is slower for smaller firms facing financial constraints. We find that the capital structures of the smallest firms are driven much more by external shocks than is the case for larger firms.

Suggested Citation

Longstaff, Francis A. and Strebulaev, Ilya A., Corporate Taxes and Capital Structure: A Long-Term Historical Perspective (August 2014). NBER Working Paper No. w20372, Available at SSRN: https://ssrn.com/abstract=2482134

Francis A. Longstaff (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-2218 (Phone)
310-206-5455 (Fax)

Ilya A. Strebulaev

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

HOME PAGE: http://faculty-gsb.stanford.edu/strebulaev/

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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