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Corporate Leverage and Nondebt Tax Shields: Evidence on Crowding-Out

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  • Downs, Thomas W

Abstract

A negative relationship between corporate leverage and tax shields has been predicted because a large non-debt tax shield reduces the expected value of interest tax savings and lessens the advantage of debt financing. Previous studies, however, have provided inconclusive and contradictory evidence on whether nondebt tax shields crowd-out debt financing. The analysis herein relies on unique constructs of discounted depreciation tax shields and presents evidence that crowding-out does not occur. Furthermore, it is shown that contradictory inferences may result from analysis of annual tax depreciation deductions instead of discounted tax shields. The findings suggest that firms with substantial cash flow from depreciation exploit their higher debt capacity by maintaining a capital structure with significantly more debt than otherwise. Copyright 1993 by MIT Press.

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  • Downs, Thomas W, 1993. "Corporate Leverage and Nondebt Tax Shields: Evidence on Crowding-Out," The Financial Review, Eastern Finance Association, vol. 28(4), pages 549-583, November.
    • Handle: RePEc:bla:finrev:v:28:y:1993:i:4:p:549-83
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    Cited by:

    1. Lee, Cheng-Few & Kuo, Nan-Ting, 2014. "Effects of ultimate ownership structure and corporate tax on capital structures: Evidence from Taiwan," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 409-425.
    2. Sanjiva Prasad & Christopher J. Green & Victor Murinde, 2005. "Company Financial Structure: A Survey and Implications for Developing Economies," Chapters, in: Christopher J. Green & Colin Kirkpatrick & Victor Murinde (ed.), Finance and Development, chapter 12, Edward Elgar Publishing.
    3. Yue Cheng & Christopher J. Green, 2008. "Taxes And Capital Structure: A Study Of European Companies," Manchester School, University of Manchester, vol. 76(s1), pages 85-115, September.
    4. Taoufik Elkemali & Aymen Ben Rejeb, 2015. "R&D Intensity and Financing Decisions: Evidence from European Firms," Economics Bulletin, AccessEcon, vol. 35(2), pages 1042-1055.
    5. Howard Qi & Sheen Liu & Dean Johnson, 2012. "A model for risky cash flows and tax shields," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 36(4), pages 868-881, October.
    6. Sanjiva Prasad & Christopher J. Green & Victor Murinde, 2001. "Company Financing, Captial Structure, and Ownership: A Survey, and Implications for Developing Economies," SUERF Studies, SUERF - The European Money and Finance Forum, number 12 edited by Morten Balling, May.
    7. Julia KORALUN-BEREŹNICKA & Dorota CIOŁEK, 2018. "Industry and Size Effect in Profitability-Capital Structure Relation: Empirical Evidence from Poland," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 93-107, December.
    8. Nadeem Ahmed Sheikh & Muhammad Azeem Qureshi, 2014. "Crowding-out or shying-away: impact of corporate income tax on capital structure choice of firms in Pakistan," Applied Financial Economics, Taylor & Francis Journals, vol. 24(19), pages 1249-1260, October.

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