Taxes and financial frictions: Implications for corporate capital structure

Abstract

According to data from Compustat, we observe three general trends between 1980 and 2012. First, firms have been reducing their reliance on debt, as leverage ratios have fallen and an increasing fraction of firms are now actually net lenders. Second, the frequency at which firms neither issue external equity nor distribute dividends to shareholders has fallen. Third, marginal corporate income tax rates have fallen significantly as well. Using Compustat balance sheet data, we structurally estimate a model in which heterogeneous firms finance investment with equity and debt. Our model incorporates costly external finance as well as a detailed tax structure, including personal, dividend and corporate income taxes. We conclude that there has been a significant reduction in the cost of external equity, while overall leverage ratios have fallen mainly because of a lower tax advantage of debt.

Corporate Taxation and Firm-Specific Determinants of Capital Structure: Evidence from the UK and US Multinational Firms

“…The OLS, on the other hand, emphasizes the importance of a negative relationship between the effective tax rate, short-term debt and total debt. The significant reason for this negative relationship is that multinationals are less likely to obtain short-and long-term debt due to reduced tax benefits and a significant decrease in the equity financing cost for the firms, in line with the findings of Macnamara (2019). Apparently, from our descriptive analysis, net equity exceeded total debt, on average.…”

“…Furthermore, they discovered that multinationals' external leverage is less sensitive to changes in tax benefits than domestic enterprises and that multinationals alter their external leverage more quickly than domestic firms. Macnamara (2019) used a detailed financing dynamic model, using the Compustat database to examine trends between 1980 and 2012 and finding that external equity costs have fallen significantly, while company leverage ratios have fallen due to reduced debt tax benefits. Wenhong et al (2015) stated that income tax rates significantly impacted a firm's capital structure listed in China.…”

Commercial Creditas An Element Of Corporate Finance

“…Using a commercial loan to make profit can be reached not only be means of interest. It can also be reached by corporation investments using both equity and debt obligations (Macnamara, 2019).…”

Macroeconomics, Firm Dynamics and IPOs

“…3 Indeed, the aim of the paper is to understand whether some of the important changes in the economic environment witnessed in this period (changes in 3 Changes in selection were studied empirically for instance in Davis et al (2006) or Comin and Philippon (2005). Changes in the behaviour of corporate firms have been studied in Armenter and Hnatkovska (2017) or Macnamara (2019), among others.…”