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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/31613
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| Title: | As Certain as Debt and Taxes: Estimating the Tax Sensitivity of
Leveragefrom Exogenous State Tax Changes |
| Authors: | Ljungqvist, Alexander
Heider, Florian |
| Issue Date: | 19-Sep-2012 |
| Series/Report no.: | FIN-12-009 |
| Abstract: | We use a natural experiment in the form of 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 114 basis points on average (equivalent to $62.1 million in
extra debt) when their home state raises tax rates. Contrary to standard
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 or investment
opportunities, union power, or states’ political leanings.
Treatment effects are heterogeneous: 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. |
| URI: | http://hdl.handle.net/2451/31613 |
| Appears in Collections: | Finance Working Papers
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