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Corporate Debt and Taxes

Author

Listed:
  • Michelle Hanlon

    (Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts, USA)

  • Shane Heitzman

    (Marshall School of Business, University of Southern California, Los Angeles, California, USA)

Abstract

We provide updates to and perspectives on the enduring topic of debt and taxes. The recent decade brought us new empirical strategies, accounting rules, and tax laws. We discuss how these and other developments change our understanding of leverage and taxes. Overall, tax incentives still do not seem to have a consistent, first-order effect on corporate capital structure. This presents a puzzle as governments increasingly limit interest deductibility, citing its contribution to overleverage and distress. We discuss critical empirical challenges such as measurement, highlight issues surrounding assumptions about tax rates and real-world financing decisions, and offer insights and direction for future research. We conclude that rather than asking if taxes are a first-order driver of corporate capital structure, a more productive goal is a greater understanding of when tax incentives yield material effects on corporate capital structure.

Suggested Citation

  • Michelle Hanlon & Shane Heitzman, 2022. "Corporate Debt and Taxes," Annual Review of Financial Economics, Annual Reviews, vol. 14(1), pages 509-534, November.
    • Handle: RePEc:anr:refeco:v:14:y:2022:p:509-534
    DOI: 10.1146/annurev-financial-101221-103806
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    Citations

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    Cited by:

    1. Wolfgang Breuer & Jannis Bischof & Christian Hofmann & Jochen Hundsdoerfer & Hans-Ulrich Küpper & Marko Sarstedt & Philipp Schreck & Tim Weitzel & Peter Witt, 2023. "Recent developments in Business Economics," Journal of Business Economics, Springer, vol. 93(6), pages 989-1013, August.

    More about this item

    Keywords

    capital structure; corporate tax; financial policy; leverage; tax policy;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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