Working Paper: NBER ID: w20372
Authors: Francis A. Longstaff; Ilya A. Strebulaev
Abstract: We study the relation between leverage and corporate tax rates using an extensive data set constructed from all corporate income tax returns filed with the IRS from 1926 to 2009. This data set includes financial statement data from millions of private and public corporations of all sizes. We show that corporate leverage has increased significantly over the past century. We find strong evidence that changes in corporate leverage are directly related to changes in corporate tax rates for all but the smallest firms. These results are robust to the inclusion of control variables for the costs of financial distress, corporate liquidity, and capital market and macroeconomic conditions. The adjustment of leverage to changes in corporate tax rates is slower for smaller firms facing financial constraints. We find that the capital structures of the smallest firms are driven much more by external shocks than is the case for larger firms.
Keywords: No keywords provided
JEL Codes: G32; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in marginal corporate tax rate (H32) | Increase in corporate leverage (G32) |
| Increase in marginal corporate tax rate (H32) | Increase in corporate leverage for medium and large firms (G32) |
| Increase in marginal corporate tax rate (H32) | Adjustment of leverage slower for smaller firms (D25) |
| Financial constraints (D10) | Adjustment of leverage decisions for small and medium-sized firms (G32) |