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The Effect of Expected Effective Corporate Tax Rates on Incremental Financing Decisions

Author

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  • Mr. Reint Gropp

Abstract

This paper uses U.S. panel data to estimate the effect of expected effective corporate tax rates on firm’s leverage. The paper directly estimates expected corporate tax rates using rational expectations. The estimated measures of the expected effective tax rates of firms are related to a continuous measure of incremental debt financing. The paper finds that expected effective tax rates are significantly and positively related to a higher level of debt financing. Simulations suggest that debt issues would double if firms were unable to shield profits and actually faced the statutory tax rate.

Suggested Citation

  • Mr. Reint Gropp, 1997. "The Effect of Expected Effective Corporate Tax Rates on Incremental Financing Decisions," IMF Working Papers 1997/046, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1997/046
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    Cited by:

    1. Gordon, Roger H. & Lee, Young, 2001. "Do taxes affect corporate debt policy? Evidence from U.S. corporate tax return data," Journal of Public Economics, Elsevier, vol. 82(2), pages 195-224, November.
    2. José A. Clemente-Almendros & Francisco Sogorb-Mira, 2016. "The effect of taxes on the debt policy of spanish listed companies," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 7(3), pages 359-391, August.
    3. Feeny, Simon & Gillman, Max & Harris, Mark N., 2005. "Econometric Accounting of the Australian Corporate Tax Rates: a Firm Panel Example," Cardiff Economics Working Papers E2005/16, Cardiff University, Cardiff Business School, Economics Section.

    More about this item

    Keywords

    WP; financing decision; research and development expenditure; leveraged firm; single tax; capital structure; Compustat data; firm i.; purposes firm; debt-equity ratio; tax payment; Effective tax rate; Tax allowances; Corporate income tax; Average effective tax rate; Wages;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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