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Corporate debt policy and tax uncertainty

Author

Listed:
  • Kathleen Petrie Fuller

    (University of Mississippi)

  • Qun Wu

    (University of Nevada – Reno)

  • Serhat Yildiz

    (University of Nevada – Reno)

Abstract

The relation between taxes and capital structure has long been studied in academic literature but the relation between tax uncertainty and capital structure remains underexplored. Using a measure of tax uncertainty based on an accounting reserve for contingent tax liability, we find that tax uncertainty is negatively associated with firms’ leverage. In terms of economic significance, the effect of tax uncertainty on capital structure is comparable to that of nondebt tax shields. Our results also show that tax uncertainty is negatively related to debt issuance. The impact of tax uncertainty is more pronounced for firms with more financial constraints and default risks. Overall, our findings highlight a new channel through which tax planning policies affect corporate policies and document that the firm’s tax uncertainty is an important determinant of its capital structure and financing policies. Our results are robust to different empirical specifications and tests.

Suggested Citation

  • Kathleen Petrie Fuller & Qun Wu & Serhat Yildiz, 2024. "Corporate debt policy and tax uncertainty," Review of Quantitative Finance and Accounting, Springer, vol. 62(1), pages 247-270, January.
    • Handle: RePEc:kap:rqfnac:v:62:y:2024:i:1:d:10.1007_s11156-023-01202-y
    DOI: 10.1007/s11156-023-01202-y
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    More about this item

    Keywords

    Tax uncertaint; Tax planning; FIN 48; Capital structure; Corporate leverage;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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