As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from Exogenous State Tax Changes
AbstractWe use a natural experiment in the form of staggered changes in corporate income tax rates across U.S. states and time to show that tax considerations are a first-order determinant of firms’ capital structure choices. Over the period 1990-2011, firms increase leverage by 114 basis points on average (equivalent to $62.1 million in extra debt) when their home state raises tax rates. Contrary to standard trade-off theory, the tax sensitivity of leverage is asymmetric: Firms do not reduce leverage in response to tax cuts. Using treatment reversals, we find this to be true even within-firm: Tax increases that are later reversed nonetheless lead to permanent increases in a firm’s leverage – an unexpected and novel form of hysteresis. Our findings are robust to various confounds due to unobserved variation in local business conditions or investment opportunities, union power, or states’ political leanings. Treatment effects are heterogeneous, with greater tax sensitivity among profitable and investment-grade firms which have a greater marginal tax benefit and lower marginal cost of issuing debt, respectively.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18263.
Date of creation: Jul 2012
Date of revision:
Publication status: published as Florian Heider, Alexander Ljungqvist. "As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from Exogenous State Tax Changes," in Viral V. Acharya, Heitor Almeida, and Malcolm Baker, organizers, "Understanding the Capital Structures of Non-Financial and Financial Corporations" Elsevier, Journal of Financial Economics (2014)
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Find related papers by JEL classification:
- G0 - Financial Economics - - General
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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- NEP-ACC-2012-08-23 (Accounting & Auditing)
- NEP-ALL-2012-08-23 (All new papers)
- NEP-PBE-2012-08-23 (Public Economics)
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