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Interest Rates, Taxes and Corporate Financial Policies

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  • Gordon, Roger
  • Lee, Young

Abstract

This paper investigates the combined effect of nominal interest rates and taxes on the use and maturity structure of corporate debt. The net tax gain from use of corporate debt is proportional to nominal interest rates, so that behavioral responses should be larger when interest rates are higher. For similar reasons, firms should shift towards more long–term debt as long–term rates rise relative to short–term rates. Our paper presents evidence consistent with both predictions, using corporate and personal tax return data from the U.S. Statistics of Income (SOI).

Suggested Citation

  • Gordon, Roger & Lee, Young, 2007. "Interest Rates, Taxes and Corporate Financial Policies," National Tax Journal, National Tax Association;National Tax Journal, vol. 60(1), pages 65-84, March.
  • Handle: RePEc:ntj:journl:v:60:y:2007:i:1:p:65-84
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    References listed on IDEAS

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    1. Alan J. Auerbach, 1979. "Wealth Maximization and the Cost of Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 93(3), pages 433-446.
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    Cited by:

    1. Aghion, Philippe & Akcigit, Ufuk & Cagé, Julia & Kerr, William R., 2016. "Taxation, corruption, and growth," European Economic Review, Elsevier, vol. 86(C), pages 24-51.
    2. Feld, Lars P. & Heckemeyer, Jost H. & Overesch, Michael, 2013. "Capital structure choice and company taxation: A meta-study," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2850-2866.
    3. Miglo, Anton, 2010. "The Pecking Order, Trade-off, Signaling, and Market-Timing Theories of Capital Structure: a Review," MPRA Paper 46691, University Library of Munich, Germany, revised 2013.
    4. Michael Pfaffermayr & Matthias Stöckl & Hannes Winner, 2013. "Capital Structure, Corporate Taxation and Firm Age," Fiscal Studies, Institute for Fiscal Studies, vol. 34(1), pages 109-135, March.
    5. Miglo, Anton & Liang, Shuting & Lee, Zhenting, 2014. "Capital Structure of Internet Companies: Case Study," MPRA Paper 56330, University Library of Munich, Germany.
    6. Strulik, Holger & Trimborn, Timo, 2012. "Laffer strikes again: Dynamic scoring of capital taxes," European Economic Review, Elsevier, vol. 56(6), pages 1180-1199.
    7. Jenny Simon, 2015. "Optimal Debt Bias in Corporate Income Taxation," CESifo Working Paper Series 5561, CESifo Group Munich.
    8. Dreßler, Daniel & Scheuering, Uwe, 2012. "Empirical evaluation of interest barrier effects," ZEW Discussion Papers 12-046, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    9. Stefan Lutz, 2012. "Effects of taxation on European multi-nationals’ financing and profits," The School of Economics Discussion Paper Series 1214, Economics, The University of Manchester.
    10. Strulik, Holger & Trimborn, Timo, 2010. "Anticipated tax reforms and temporary tax cuts: A general equilibrium analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 2141-2158, October.
    11. Miglo, Anton, 2012. "Managers versus students: new approach in improving capital structure education," MPRA Paper 46695, University Library of Munich, Germany.

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