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Real Determinants of Corporate Leverage

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  • Alan J. Auerbach

Abstract

The U.S. corporate tax distorts the behavior of both real and financial decisions. With respect to the former, the variation in depreciation allowances and investment tax credit provisions across types of investments leads to widely vazying effective tax rates, especially since 1981. Financial policy is distorted by the differential treatment of debt and equity. The purpose of this paper is to examine, using firm-level panel data, the relationship between real and financial decisions by corporations, in part to determine the extent to which these biases off set or reinforce each other.Our results are tentative and suggest that patterns of real and financial behavior are only partially consistent with predictions of various capital structure models (e.g. bankruptcy/agency cost, limited taxshield)and that there is no obvious offset on the financial side to the tax bias against investment in structures.

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File URL: http://www.nber.org/papers/w1151.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1151.

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Date of creation: Jun 1983
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Publication status: published as Auerbach, Alan J. "Real Determinants of Corporate Leverage." Corporate Capital Structure in the U.S., edited by B. M. Friedman. Chicago: Universityof Chicago Press, (1985), pp. 301-322.
Handle: RePEc:nbr:nberwo:1151

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  1. Alan J. Auerbach, 1980. "Wealth Maximization and the Cost of Capital," NBER Working Papers 0254, National Bureau of Economic Research, Inc.
  2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  3. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
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