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Corporate tax aggression and debt

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  • Lin, Shannon
  • Tong, Naqiong
  • Tucker, Alan L.

Abstract

We provide a tradeoff model of the capital structure that allows leverage to be a function of a firm’s choice of tax aggressiveness. The model’s testable implications are supported empirically. Debt use is inversely related to corporate tax aggression for most firms, and the relation is economically important. This substitution effect is especially evident for firms exhibiting high tax-shelter prediction scores. The effect attenuates for benign forms of tax avoidance and during the recent credit crisis period. For the most profitable firms, debt and tax aggression are complements. Our results extend the empirical findings of Graham and Tucker (2006).

Suggested Citation

  • Lin, Shannon & Tong, Naqiong & Tucker, Alan L., 2014. "Corporate tax aggression and debt," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 227-241.
    • Handle: RePEc:eee:jbfina:v:40:y:2014:i:c:p:227-241
    DOI: 10.1016/j.jbankfin.2013.11.035
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    References listed on IDEAS

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    Cited by:

    1. Jin, Xiaoye, 2021. "Corporate tax aggressiveness and capital structure decisions: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 94-111.
    2. Wei Huang & Tingting Ying & Yun Shen, 2018. "Executive cash compensation and tax aggressiveness of Chinese firms," Review of Quantitative Finance and Accounting, Springer, vol. 51(4), pages 1151-1180, November.
    3. Ferchichi Jihene & Dabboussi Moez, 2019. "The Moderating Effect of Audit Quality on CEO Compensation and Tax Avoidance: Evidence from Tunisian Context," International Journal of Economics and Financial Issues, Econjournals, vol. 9(1), pages 131-139.
    4. Allen, Arthur & Francis, Bill B. & Wu, Qiang & Zhao, Yijiang, 2016. "Analyst coverage and corporate tax aggressiveness," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 84-98.
    5. Kenneth J. Kopecky & Zhichuan (Frank) Li & Timothy F. Sugrue & Alan L. Tucker, 2018. "Revisiting M&M with Taxes: An Alternative Equilibrating Process," IJFS, MDPI, vol. 6(1), pages 1-12, January.
    6. Peter Vaz da Fonseca & Andrea Decourt Savelli & Michele Nascimento Juca, 2020. "A Systematic Review of the Influence of Taxation on Corporate Capital Structure," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 155-178.
    7. Yun Luo & Sailesh Tanna, 2014. "Taxation and bank risk-taking," Chapters, in: Sajid M. Chaudhry & Andrew W Mullineux (ed.), Taxing Banks Fairly, chapter 2, pages 31-53, Edward Elgar Publishing.
    8. C. S. Agnes Cheng & Peng Guo & Chia‐Hsiang Weng & Qiang Wu, 2021. "Innovation and Corporate Tax Planning: The Distinct Effects of Patents and R&D," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 621-653, March.

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    More about this item

    Keywords

    Tax planning; Tax aggression; Leverage; Debt; Capital structure;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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