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

Florian Heider, Alexander Ljungqvist

NBER Working Paper No. 18263
Issued in July 2012
NBER Program(s):   CF

We use a natural experiment in the form of 121 staggered changes in corporate income tax rates across U.S. states to show that tax considerations are a first-order determinant of firms' capital structure choices. Over the period 1990-2011, firms increase long-term leverage by 104 basis points on average (or $32.5 million in extra debt) in response to an average tax increase of 131 basis points. Contrary to static trade-off theory, the tax sensitivity of leverage is asymmetric: firms do not reduce leverage in response to tax cuts. Using treatment reversals, we find this to be true even within-firm: tax increases that are later reversed nonetheless lead to permanent increases in a firm's leverage - an unexpected and novel form of hysteresis. Our findings are robust to various confounds such as unobserved variation in local business conditions, union power, or unemployment risk. 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.

You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.


This paper was revised on April 15, 2014

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w18263

Forthcoming: As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from Exogenous State Tax Changes, Florian Heider, Alexander Ljungqvist. in Understanding the Capital Structures of Non-Financial and Financial Corporations, Acharya, Almeida, and Baker. 2014

Users who downloaded this paper also downloaded these:
Sahin, Song, Topa, and Violante w18265 Mismatch Unemployment
Farre-Mensa and Ljungqvist w19551 Do Measures of Financial Constraints Measure Financial Constraints?
Bernard, Blanchard, Van Beveren, and Vandenbussche w18246 Carry-Along Trade
Hortacsu, Matvos, Syverson, and Venkataraman w16197 Are Consumers Affected by Durable Goods Makers' Financial Distress? The Case of Auto Manufacturers
Asker, Farre-Mensa, and Ljungqvist w17394 Comparing the Investment Behavior of Public and Private Firms
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us