Corporate Income Taxation, Leverage at Entry, and the Growth of Entrepreneurial Companies

Abstract

We study whether corporate income taxation affects the long-term growth of newly incorporated companies through its effect on their choice of leverage at entry. We find that a decrease in corporate income taxation leads to a sizeable decrease in leverage at entry, and that the distribution of leverage at entry is persistent over several years. This effect on initial conditions has long-term implications: we document an inverted-U relationship between leverage at entry and long-term corporate growth, conditional on survival. These effects are economically sizeable and stronger in countries with better creditor rights and more transparent financial transactions.

Keywords: Corporate income taxation; Capital structure; Entrepreneurial finance; Corporate

JEL Classification: G32; H25; L25; L26