Corporate Income Taxation, Leverage at Entry, and the Growth of Entrepreneurial Companies
CentER Discussion Paper Series No. 2018-055
53 Pages Posted: 9 Jan 2019 Last revised: 9 Aug 2019
Date Written: August 08, 9
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
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