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Debt and Taxes: The Role of Tax Avoidance

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  • Brok, Peter

Abstract

Empirically, the effect of corporate tax rates on leverage has been smaller than expected based on trade-off theory. In this article, I show that tax avoidance functions as a non-debt tax shield, reducing the benefits of the debt tax shield. I find that higher tax rates cause higher non-debt tax avoidance, which crowds out the debt tax shield. Moreover, I show that the strength of the relationship between debt and tax rates depends on the level of tax avoidance. A 1-standard-deviation higher tax rate implies 2.8% higher leverage for low tax avoidance firms, but has a negative effect for high tax avoidance firms.

Suggested Citation

  • Brok, Peter, 2026. "Debt and Taxes: The Role of Tax Avoidance," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 61(4), pages 2007-2032, June.
    • Handle: RePEc:cup:jfinqa:v:61:y:2026:i:4:p:2007-2032_14
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