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Taxes Depress Corporate Borrowing: Evidence from Private Firms

Author

Listed:
  • Ivanov, Ivan T.

    (Federal Reserve Board, Washington)

  • Pettit, Luke

    (United States Senate, Washington)

  • Whited, Toni

    (University of Michigan and NBER)

Abstract

We re-examine the relation between taxes and corporate leverage, using variation in state corporate income tax rates. In contrast with prior research, we document that corporate leverage increases following tax cuts for both privately held and publicly listed firms. We use an estimated dynamic equilibrium model to show that tax cuts result in lower default spreads and more distant default thresholds. These effects outweigh the loss of benefits from the interest tax deduction and lead to higher leverage, especially for privately held firms. Overall, debt tax shields appear to be a secondary capital structure consideration.

Suggested Citation

  • Ivanov, Ivan T. & Pettit, Luke & Whited, Toni, 2021. "Taxes Depress Corporate Borrowing: Evidence from Private Firms," IHS Working Paper Series 32, Institute for Advanced Studies.
    • Handle: RePEc:ihs:ihswps:32
    as

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    File URL: https://irihs.ihs.ac.at/id/eprint/5848/
    File Function: First version, 2021
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    References listed on IDEAS

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    Cited by:

    1. John R. Graham, 2022. "Presidential Address: Corporate Finance and Reality," Journal of Finance, American Finance Association, vol. 77(4), pages 1975-2049, August.
    2. Fakos, Alexandros & Sakellaris, Plutarchos & Tavares, Tiago, 2022. "Investment slumps during financial crises: The real effects of credit supply," Journal of Financial Economics, Elsevier, vol. 145(1), pages 29-44.
    3. Toni M. Whited, 2022. "Integrating Structural and Reduced-Form Methods in Empirical Finance," Papers 2205.01175, arXiv.org.

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