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

38 Pages Posted: 14 Jun 2019 Last revised: 13 Jan 2020

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: January 9, 2020

Abstract

The Tax Cuts & Jobs Act of 2017 (TCJA) placed limitations on the deductibility of interest for U.S. firms. Using a difference-in-differences design examining both affected and unaffected firms, we show that following the enactment of the new limitations, affected firms significantly decrease corporate leverage. Specifically, we find that relative to unaffected U.S. firms, affected firms experience a decrease in leverage of 2.9% of assets; corresponding to about $126 million per firm and $29.8 billion aggregated over our full sample. This represents a debt decrease of 5.8% relative to the average debt to asset ratio for the pre-TCJA affected sample. We find similar results using a triple differences design, which benchmarks debt trends in the U.S. to those of unaffected and pseudo-affected Canadian firms that would be subject to the limitation had they been U.S. firms. These results are driven by decreases in long-term domestic debt and by declines in new issuances rather than repayment of existing debt. Robustness tests indicate other elements of tax reform do not influence the results. We also find firms not currently subject to limitations on interest but subject to future limitations decrease leverage by about half as much as firms currently subject to interest limits.

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 (January 9, 2020). 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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
204
Abstract Views
893
rank
156,539
PlumX Metrics