Do Taxes Affect Corporate Financing Decisions?

No 2632, NBER Working Papers from National Bureau of Economic Research, Inc

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.

Date: 1988-06
Note: PE
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Published as Journal of Finance, December 1990.

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