Do Taxes Affect Corporate Financing Decisions?

Abstract

A new empirical method and data set are used to study the effects of tax policy on corporate financing choices. Clear evidence emerges that non-debt tax shields "crowd out" interest deductibility, thus decreasing the desirability of debt issues at the margin. Previous studies which failed to find tax effects examined debt-equity ratios rather than individual, well-specified financing choices. This paper also demonstrates the importance of controlling for confounding effects which other papers ignored. Results on other (asymmetric information) effects on financing decisions are also presented.

Determinants of Capital Structure: An Empirical Study of Companies From Selected Post-Transition Economies

“…One should bear in mind that the relative tax burden in many countries today is significantly lower than the one that prevailed in the times of Modigliani's and Miller's work. Also, the empirical studies in many cases have so far failed to prove the utilization of tax shields by the companies in this respect, mostly because they have been based on debt/equity ratios, rather than on incremental borrowing decisions (MacKie-Mason, 1990, p. 1471.…”

Taxes and the Financial Structure of German Inward FDI

“…10 While the older literature has generally failed to find significant effects on corporate financing, recent studies of national firms have been more successful in identifying tax effects. MacKie-Mason (1990) looks at the marginal source of finance as a function of the corporate tax rate by looking at the loss carry-forward position of firms. For firms with high loss carry-forwards the tax deductibility of interest has a lower value than for profitable firms.…”

Corporate Financing Decisions and Non-Debt Tax Shields: Evidence from Italian Experiences in the 1990s

“…MacKie-Mason (1990), in particular, noted that the substitution effect is more applicable to firms which are close to tax exhaustion. His findings were subsequently confirmed by others, including Trezevant (1992) and Graham (1996a).…”

“…We conduct a review of the literature in relation to the specific problems involved in the present analysis, and then follow the technique proposed by MacKie-Mason (1990). We use non-debt tax shields, including those introduced by the tax reforms, as proxies for the marginal tax rates in regression analysis.…”