Abstract
We provide a tradeoff model of the capital structure that allows leverage to be a function of a firm's choice of tax aggressiveness. The model's testable implications are supported empirically. Debt use is inversely related to corporate tax aggression for most firms, and the relation is economically important. This substitution effect is especially evident for firms exhibiting high tax-shelter prediction scores. The effect attenuates for benign forms of tax avoidance and during the recent credit crisis period. For the most profitable firms, debt and tax aggression are complements. Our results extend the empirical findings of Graham and Tucker (2006).
| Original language | English |
|---|---|
| Pages (from-to) | 227-241 |
| Number of pages | 15 |
| Journal | Journal of Banking and Finance |
| Volume | 40 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - Mar 2014 |
Bibliographical note
Funding Information:We thank the referee as well as seminar participants at Fudan University’s School of Management, Peking University’s HSBC Business School, the American Accounting Association Conferences held in Philadelphia, PA (April 2012) and Washington, D.C. (August 2012), the Asia-Financial Management Association Conference held in Shanghai, China (April 2013), and the European Financial Management Association Conference held in Reading, United Kingdom (June 2013). We also thank Kenneth Kopecky of Temple University for his insights regarding the model, and Gong Zhou of Fudan University, James Stekelberg of the University of Southern California, and Agnieszka Trzeciakiewicz of Hull University for their helpful comments on earlier versions of this paper. Part of this research was conducted while Tucker was on faculty at Fudan University (Shanghai, China), and he acknowledges research funding support provided by Fudan’s Finance Center.
ASJC Scopus Subject Areas
- Finance
- Economics and Econometrics