As certain as debt and taxes: Estimating the tax sensitivity of leverage from state tax changes

Heider, Florian; Ljungqvist, Alexander

doi:10.1016/j.jfineco.2015.01.004

Cited by 466 publications

(268 citation statements)

References 35 publications

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“…empirical study by Heider and Ljungqvist (2015). However, this is consistent with our expectation that there might be a lower cost of equity financing in Australia (Melia, Docherty and Easton, 2015).…”

Section: What Are the Determinants Of Financial Leverage Prior To Or supporting

confidence: 89%

A Contemporary View of Corporate Finance Theory, Empirical Evidence and Practice

2015

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This paper uses a survey of Australian Corporate Treasurers to shed light on the gap between the theory and practice of corporate finance in Australia. Seven areas are examined: capital structure, payout policy, cash holdings, initial public offerings, seasoned equity offering, mergers and acquisitions, and corporate governance. We also exploit the Global Financial Crisis to examine the effect of liquidity shocks on a firm's capital structure choices. We then compare our Australian survey results with results from a comprehensive U.S. survey conducted by Graham and Harvey (2001). Our survey shows that the board of directors play the most important role in determining capital structure decisions and that corporate treasurers play the most important role in cash holding decisions. This contrasts with the academic literature that has typically focused on the role of CEO in both capital structure and cash holdings decisions. In addition, our respondents do not view the tax advantage of interest deductibility to be of first order of importance for debt issuance choices, which contrasts with most of the U.S. empirical studies. Finally, we juxtapose the theory-practice perspective, with a review of the most recent five years (2011)(2012)(2013)(2014)(2015) of corporate finance research published in the leading Asia Pacific Basin finance journals. Abstract This paper uses a survey of Australian Corporate Treasurers to shed light on the gap between the theory and practice of corporate finance in Australia. Seven areas are examined: capital structure, payout policy, cash holdings, initial public offerings, seasoned equity offering, mergers and acquisitions, and corporate governance. We also exploit the Global Financial Crisis to examine the effect of liquidity shocks on a firm's capital structure choices. We then compare our Australian survey results with results from a comprehensive U.S. survey conducted by Graham and Harvey (2001). Our survey shows that the board of directors play the most important role in determining capital structure decisions and that corporate treasurers play the most important role in cash holding decisions. This contrasts with the academic literature that has typically focused on the role of CEO in both capital structure and cash holdings decisions. In addition, our respondents do not view the tax advantage of interest deductibility to be of first order of importance for debt issuance choices, which contrasts with most of the U.S. empirical studies. Finally, we juxtapose the theory-practice perspective, with a review of the most recent five years (2011)(2012)(2013)(2014)(2015) of corporate finance research published in the leading Asia Pacific Basin finance journals.

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Section: What Are the Determinants Of Financial Leverage Prior To Or supporting

confidence: 89%

A Contemporary View of Corporate Finance Theory, Empirical Evidence and Practice

2015

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“…According to theory, the marginal tax rate (MTR), defined as the present value of additional taxes paid on an additional dollar of income earned today (Scholes et al, 2014), is the appropriate rate to use to evaluate incremental corporate decisions (MacKie-Mason, 1990; Graham, 1996a, b;Brealey, Myers, and Allen, 2014;and Scholes et al, 2014). Consistent with this theory, prior research finds that the MTR is correlated with firms' capital structure decisions (e.g., Graham, 1996a;Heider and Ljungqvist, 2015). However, prior research also finds that some firms appear to follow conservative debt policies given their MTRs (e.g., Graham, 2000;Strebulaev and Yang, 2013), raising the question of whether managers use the appropriate tax input when making corporate decisions.…”

mentioning

confidence: 87%

Tax Rates and Corporate Decision Making

et al. 2015

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Abstract:We survey companies and find that many use incorrect tax rate inputs into important corporate decisions. Specifically, many companies use an average tax rate (the GAAP effective tax rate, ETR) to evaluate incremental decisions, rather than using the theoretically correct marginal tax rate. We find evidence consistent with behavioral biases (heuristics, salience) and managers' educational backgrounds affecting these choices. We estimate the economic consequences of using the theoretically incorrect tax rate and find that using the ETR for capital structure decisions leads to suboptimal leverage choices and using the ETR in investment decisions makes firms less responsive to investment opportunities. This paper is the winner of the American Accounting Association 2015 FARS Midyear Meeting Best Paper Award. We thank John Barrios for sharing data on the LinkedIn profiles of our survey respondents. We appreciate helpful comments from Robin Greenwood (the editor), two anonymous referees, Mary Barth, James Chyz, Bryan Cloyd, Russ Lundholm, Lil Mills (discussant), Richard Sansing, Joel Slemrod (discussant), seminar participants at the Baruch College, Columbia Law School, INSEAD conference, International Institute for Public Finance (IIPF) Annual Congress (Dublin), MaTax Conference in Germany, Stanford Summer Camp, University of California, Davis, University of Tennessee, and Virginia Tech University. Thanks to the following people for helpful comments on the development of survey questions: Jennifer Blouin, Merle Erickson, Ken Klassen, Ed Maydew, Peter Merrill, Lil Mills, Sonja Rego, Richard Sansing, Stephanie Sikes, Joel Slemrod, and Ryan Wilson. We also appreciate the support of PricewaterhouseCoopers (especially Peter Merrill) and the Tax Executives Institute (especially Tim McCormally) in asking firms to participate and in reviewing the survey document. We are grateful for the discussions with several tax executives about their role in their company. Finally, each author is grateful for the financial support of the Fuqua School of Business, Paton Accounting Fund at the University of Michigan, MIT Junior Faculty Research Assistance Program, and the Paul Merage School of Business at the University of California-Irvine. All errors are our own. 1Taxes represent a significant cost for most profitable corporations and, thus, are an important input into many corporate decisions (see Shackelford and Shevlin (2001), Graham (2003), and Hanlon and Heitzman (2010) for reviews). According to theory, the marginal tax rate (MTR), defined as the present value of additional taxes paid on an additional dollar of income earned today (Scholes et al., 2014), is the appropriate rate to use to evaluate incremental corporate decisions (MacKie-Mason, 1990; Graham, 1996a, b;Brealey, Myers, and Allen, 2014;and Scholes et al., 2014). Consistent with this theory, prior research finds that the MTR is correlated with firms' capital structure decisions (e.g., Graham, 1996a;Heider and Ljungqvist, 2015). However, prior research also finds...

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“…Akin to Heider and Ljungqvist (2015), we employ tax changes at the district level to establish the dierential treatment of rms' credit demand. Specically, we exploit regional corporate taxes (Gewerbesteuer), on which each municipality decides autonomously in each year.…”

Section: Regional Taxesmentioning

confidence: 99%

“…Like Heider and Ljungqvist (2015) we use tax changes rather than levels and measure a regional 6 We average corporate tax multipliers per district to preserve condentiality of the loan customer data. scal stimulus RF S with an indicator variable equal to 1 if the district decreased its corporate tax rate compared with the previous year.…”

Section: Regional Taxesmentioning

confidence: 99%

“…Djankov et al (2010) show that corporate investment demand, and thus demand for credit, depends inversely on rms' tax burden. Similar to Heider and Ljungqvist (2015), we use the spatial dispersion of scal policy to explain the cross-sectional variation in loan rates of corporate customers residing in dierent regional markets but that are exposed to an identical unorthodox monetary policy.…”

Section: Introductionmentioning

confidence: 99%

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Monetary Policy Under the Microscope: Intra-Bank Transmission of Asset Purchase Programs of the ECB

Cycon

Koetter

2015

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We decompose corporate lending rates into renancing costs, as determined by money markets, and markups that the bank is able to charge its customers in regional markets. This decomposition reveals how banks transmit monetary policy within their organizations. To identify policy eects on loan rate components, we exploit the co-existence of Eurozone-wide security purchase programs and regional scal policies at the district level. European Central Bank purchase programs reduced renancing costs signicantly, even in an economy not specically targeted for sovereign debt stress relief, but not loan rates themselves. However, asset purchases mitigated those loan price hikes due to additional credit demand stimulated by regional tax policy and enabled the bank to realize larger economic margins. Terms of use: Documents in

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As certain as debt and taxes: Estimating the tax sensitivity of leverage from state tax changes

Cited by 466 publications

References 35 publications

A Contemporary View of Corporate Finance Theory, Empirical Evidence and Practice

A Contemporary View of Corporate Finance Theory, Empirical Evidence and Practice

Tax Rates and Corporate Decision Making

Monetary Policy Under the Microscope: Intra-Bank Transmission of Asset Purchase Programs of the ECB

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