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Corporate Tax Incentives and Capital Structure: Empirical Evidence from UK Tax Returns

Author

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  • Michael P. Devereux
  • Giorgia Maffini
  • Jing Xing

Abstract

This paper examines how companies’ capital structure is affected by the corporate income tax system. Our analysis employs confidential company-level corporation tax return data in the UK. Our main identification strategy is based on variation in companies␣ marginal tax rates due to the existence of kinks in the corporate tax rate schedule. Using a dynamic adjustment model of capital structure, we find a positive and substantial long-run tax effect on companies' financial leverage. We show that there are considerable discrepancies between estimates of taxable profits reported in tax return data and in financial statements and that the estimated tax effect on capital structure using financial statements is likely to be biased downward. We find that companies adjust their capital structures gradually in response to changes in the marginal tax rate. Moreover, we find that the external leverage of domestic stand-alone companies and of multinational companies responds strongly to corporate tax incentives.

Suggested Citation

  • Michael P. Devereux & Giorgia Maffini & Jing Xing, 2015. "Corporate Tax Incentives and Capital Structure: Empirical Evidence from UK Tax Returns," Working Papers 076, "Carlo F. Dondena" Centre for Research on Social Dynamics (DONDENA), Università Commerciale Luigi Bocconi.
  • Handle: RePEc:don:donwpa:076
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    Cited by:

    1. Fischer, Marcel & Jensen, Bjarne Astrup, 2019. "The debt tax shield in general equilibrium," Journal of Banking & Finance, Elsevier, vol. 100(C), pages 151-166.
    2. Peter Vaz da Fonseca & Michele Nascimento Juca & Wilson Toshiro Nakamura, 2020. "Debt Tax Benefits in a High Tax Emerging Market: Evidence from Brazil," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 35-52.

    More about this item

    Keywords

    Corporate taxation; capital structure; tax returns.;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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