Taxes, Governance, and Debt Maturity Structure: International Evidence

Abstract

We provide a cross-country evidence on the impact of corporate and personal income taxes, and corporate governance systems on debt maturity structures and leverage using a comprehensive sample of 212,642 firm-year observations based on a sample of 19,573 firms from 24 OECD countries over the period 1990 to 2015. We find longer debt maturities, higher leverage, and, in a dynamic setting, a greater propensity to decrease short-term debt, in countries with high investor protection and where the potentials for debt tax shields and after-tax return of investors are high. Our results imply that when investors are protected, firms tend to have optimal debt maturities to maximize the gains from tax shields and minimize the tax cost of equity. In contrast, in low protection countries, investors prefer their firms to opt for low debt that is mainly short-term to mitigate the risk-shifting and debt overhang problems even if this entails forgoing the debt tax shields. Our results hold for various robustness checks including the hierarchical linear model specification, which corrects for a number of OLS biases.

Keywords: Debt Maturity, Debt Overhang, Risk-Shifting, Signalling, Classical and Imputation Tax Systems

JEL Classification: G32