European Central Bank
Kaiserstrasse 29 D-60311
Frankfurt am Main, Germany
Information about this author at RePEc
NBER Working Papers and Publications
|April 2013||As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from State Tax Changes|
with Alexander Ljungqvist
in New Perspectives on Corporate Capital Structure, Viral V. Acharya, Heitor Almeida, and Malcolm Baker, organizers
|July 2012||As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from Exogenous State Tax Changes|
with Alexander Ljungqvist: w18263
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 ...
Published: Florian Heider & Alexander Ljungqvist, 2015. "As certain as debt and taxes: Estimating the tax sensitivity of leverage from state tax changes," Journal of Financial Economics, vol 118(3), pages 684-712.