A Review of Taxes and Corporate Finance

Abstract

This paper reviews domestic and multinational corporate tax research. For each topic, the theoretical arguments explaining how taxes can affect corporate decision-making and firm value are reviewed, followed by a summary of the related empirical evidence and a discussion of unresolved issues. Tax research generally supports the hypothesis that high-tax rate firms pursue policies that provide tax benefits. Many issues remain unresolved, however, including understanding whether tax effects are of first-order importance, why firms do not pursue tax benefits more aggressively, and whether corporate actions are affected by investor-level taxes.

The Cost of Debt

“…28 28 We note that this provides some of the first purely time‐series evidence that taxes affect corporate capital structure decisions (as called for by Graham (2003)). …”

“…9 9 To our knowledge, this is the most direct time‐series tax evidence in the literature. See Graham (2003). …”

Why are firms unlevered?

“…In his comprehensive review of taxes and corporate finance, Graham (2006) calls for more research to examine why firms appear to use less debt than the optimally desirable amount. In this paper, we examine the validity of two explanations that have been suggested for the "low leverage" puzzle using a sample of unlevered firms.…”

Financial Synergies and the Optimal Scope of the Firm: Implications for Mergers, Spinoffs, and Structured Finance

“…If the corporate tax rate is τ C and the marginal investor is taxable at rates τ E on equity income and τ P on interest income, then Miller (1977) derives an effective tax rate ). For post‐1986 average personal and corporate tax rates, Graham (2003) shows that this formula would imply τ = 10%. However, several authors find empirical evidence that τ may be considerably larger.…”