Debt and Taxes? The Effect of TCJA Interest Limitations on Capital Structure

35 Pages Posted: 14 Jun 2019

See all articles by Richard Carrizosa

Richard Carrizosa

University of Texas at El Paso - Department of Accounting & Information Systems

Fabio B. Gaertner

University of Wisconsin - Madison - Department of Accounting and Information Systems

Dan Lynch

University of Wisconsin - Madison - Department of Accounting and Information Systems

Date Written: May 31, 2019

Abstract

Using a difference-in-differences design, we show that new limitations on the deductibility of interest, enacted as part of the Tax Cuts & Jobs Act of 2017 (TCJA), significantly decrease corporate leverage. Specifically, we find that relative to unaffected U.S. firms, affected firms experience a decrease in leverage of 3.5% of assets; corresponding to about $156 million per firm and $38 billion for the whole treatment sample. We find similar results when benchmarking our treatment firms to a control group of Canadian firms that would be subject to the limitation had they been headquartered in the U.S. Robustness tests suggest our results are not driven by other elements of tax reform. We also find that firms not currently subject to limitations on interest but which are likely subject to future limitations decrease leverage by about half as much as firms currently subject to interest limits. Overall, we find that the new interest limitations significantly alter the market for corporate debt.

Keywords: TCJA, tax reform, interest limitation, capital structure, debt, leverage

JEL Classification: H26, H71, H72

Suggested Citation

Carrizosa, Richard and Gaertner, Fabio B. and Lynch, Dan, Debt and Taxes? The Effect of TCJA Interest Limitations on Capital Structure (May 31, 2019). Available at SSRN: https://ssrn.com/abstract=3397285 or http://dx.doi.org/10.2139/ssrn.3397285

Richard Carrizosa

University of Texas at El Paso - Department of Accounting & Information Systems ( email )

University Library - Acquisitions Department
500 West University Avenue
El Paso, TX 79968
United States

Fabio B. Gaertner

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Dan Lynch (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

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