Tax Shelters and Corporate Debt Policy

37 Pages Posted: 17 Dec 2004

See all articles by John R. Graham

John R. Graham

Duke University; National Bureau of Economic Research (NBER)

Alan L. Tucker

Pace University - Lubin School of Business

Date Written: August 17, 2005


We use a novel sample of 44 tax shelter cases involving public corporations to investigate which types of firms shelter, the magnitude of the tax shelters they use, and whether participating in a shelter affects corporate debt policy. The propensity to shelter increases with firm size, profitability, R&D expenditures, foreign operations, and the market to book ratio. The average deduction produced by the shelters in our sample is very large, equaling approximately nine percent of asset value. This is about three times as large as interest deductions for comparable firms.

Our results suggest that corporations substitute away from debt when using tax shelters. Seven years before they engage in sheltering activity, shelter firms have mean debt ratios of about 25 percent, roughly equivalent to matched firm debt ratios. By the year of the sheltering activity, shelter firm debt ratios have fallen to approximately 18 percent while matched firm debt ratios have not fallen. These results help explain why some firms appear to be under-levered when tax-sheltering activity is ignored, and also why corporate tax payments have fallen so precipitously in recent years.

Keywords: Taxes, tax shelters, debt, capital structure

JEL Classification: G32, K34

Suggested Citation

Graham, John Robert and Tucker, Alan L., Tax Shelters and Corporate Debt Policy (August 17, 2005). Available at SSRN: or

John Robert Graham (Contact Author)

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alan L. Tucker

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States

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