Debt and taxes: Evidence from the real estate industry |
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| Institution: | 1. School of Management, Xi''an Jiaotong University, No. 28, Xianning West Road, Xi''an 710049, Shaanxi, PR China;2. School of Power and Energy, Xi''an Jiaotong University, No. 28, Xianning West Road, Xi''an 710049, Shaanxi, PR China;3. The Business School, The University of Adelaide, 10 Pulteney Street, Adelaide, SA 5005, Australia;1. Division of Monetary Affairs, Board of Governors of the Federal Reserve System, Washington, DC 20551, USA;2. Ecole Polytechnique Fédérale de Lausanne, Extranef 210, Lausanne, Switzerland;3. Finance Faculty, Cass Business School, City University London, 106 Bunhill Row, London EC1Y 8TZ, UK;4. University of Bern, Engehaldenstrasse 4, Bern 3012, Switzerland;5. University of Geneva, 1211 Geneva, Switzerland;6. Swiss Finance Institute, Boulevard du Pont d''Arve, Geneva, Switzerland;7. CEPR, London EC1V 0DX, United Kingdom;1. Henley Business School, University of Reading, Reading RG6 6UD, UK;2. Portsmouth Business School, University of Portsmouth, Portsmouth PO1 3DE, UK;1. Leeds School of Business, University of Colorado, United States;2. McIntire School of Commerce, University of Virginia, United States |
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| Abstract: | Compelling empirical evidence documenting a material effect of corporate taxes on leverage decisions is limited, in part because of difficulties in constructing an effective proxy for the firm's tax benefit of debt. We examine leverage decisions across taxable and nontaxable real estate firms—firms for which we can measure the relative tax benefit of debt with little error. The tax hypothesis implies that for firms with similar asset portfolios, taxable firms should have more debt than their nontaxable counterparts. Consistent with this, leverage ratios of taxable real estate firms are higher than their nontaxable counterparts, but the magnitude of this difference is at most one-half of that implied by studies that employ simulated marginal tax rates. |
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