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As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from State Tax Changes

In: New Perspectives on Corporate Capital Structure

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  • Florian Heider
  • Alexander Ljungqvist

Abstract

Using staggered corporate income tax changes across U.S. states, we show that taxes have a first-order effect on capital structure. Firms increase leverage by around 40 basis points for every percentage-point tax increase. Consistent with dynamic tradeoff theory, the effect is asymmetric: leverage does not respond to tax cuts. This is true even within-firm: tax increases that are later reversed nonetheless lead to permanent leverage increases. The treatment effects are heterogeneous and confirm the tax channel: tax sensitivity is greater among profitable and investment-grade firms which respectively have a greater marginal tax benefit and lower marginal cost of issuing debt.
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Suggested Citation

  • Florian Heider & Alexander Ljungqvist, 2013. "As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from State Tax Changes," NBER Chapters, in: New Perspectives on Corporate Capital Structure, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberch:13266
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    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • 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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