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Do Taxes Affect Corporate Financing Decisions?

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  • MacKie-Mason, Jeffrey K

Abstract

This paper provides clear evidence of substantial tax effects on the choice between issuing debt or equity; most studies fail to find significant effects. The relationship between tax shields and debt policy is clarified. Other papers miss the fact that most tax shields have a negligible effect on the marginal tax rate for most firms. New predictions are strongly supported by an empirical analysis; the method is to study incremental financing decisions using discrete choice analysis. Previous researchers examined debt/equity ratios, but tests based on incremental decisions should have greater power. Copyright 1990 by American Finance Association.

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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 45 (1990)
Issue (Month): 5 (December)
Pages: 1471-1493

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Handle: RePEc:bla:jfinan:v:45:y:1990:i:5:p:1471-93
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  13. Titman, Sheridan, 1984. "The effect of capital structure on a firm's liquidation decision," Journal of Financial Economics, Elsevier, vol. 13(1), pages 137-151, March.
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  19. Marsh, Paul, 1982. " The Choice between Equity and Debt: An Empirical Study," Journal of Finance, American Finance Association, vol. 37(1), pages 121-144, March.
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  22. Hess, Alan C & Frost, Peter A, 1982. " Tests for Price Effects of New Issues of Seasoned Securities," Journal of Finance, American Finance Association, vol. 37(1), pages 11-25, March.
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  25. Taub, Allan J, 1975. "Determinants of the Firm's Capital Structure," The Review of Economics and Statistics, MIT Press, vol. 57(4), pages 410-416, November.
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