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Taxes and capital structure: evidence from firms' response to the Tax Reform Act of 1986 |
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| Authors: | Givoly D; Hayn C; Ofer AR; Sarig O |
| Institution: | 1 Tel Aviv University, Isarael and Northwestern University, USA 2 JL Kellog Graduate School of Management, Northwestern University, Leverone Hall, 2001 Sheridan Road, Evanson, IL 60208, USA 3 Tel Aviv University, Israel and Northwestern University, USA 4 Tel Aviv University, Israel and The University of Pennsylvania, USA z Corresponding author |
| Abstract: | While the theoretical relation between taxes and capital structurehas been extensively analyzed, the empirical evidence on thisissue has thus far been inconclusive. One of the main difficultiesconfronting previous empirical studies of the cross-sectionalrelationship between taxes and leverage was the control of interveningvariables. The Tax Reform Act of 1986 (TRA), which drasticallychanged the tax regime, provides a unique opportunity to assessthe interaction between taxes and leverage decisions in a controlledenvironment. We test the relationship between leverage and certaintax-related variables for a large sample of companies in theyears surrounding the enactment of the TRA. The results supportthe tax-based theories of capital structure. The findings indicatethat there exists a substitution effect between debt and nondebttax shields, and that both corporate and personal tax ratesaffect leverage decisions. |
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