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Taxes and Capital Structure

Part of: JFQA William F. Sharpe Best Paper Award Winner

Published online by Cambridge University Press:  30 June 2015

Mara Faccio  and
Jin Xu
Mara Faccio
Affiliation:
mfaccio@purdue.edu, Krannert School of Management, Purdue University, West Lafayette, IN 47906
Jin Xu*
Affiliation:
xujin@vt.edu, Pamplin College of Business, Virginia Polytechnic Institute and State University, Blacksburg, VA 24061.
*
*Corresponding author: xujin@vt.edu
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Abstract

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We use nearly 500 shifts in statutory corporate and personal income tax rates as natural experiments to assess the effect of corporate and personal taxes on capital structure. We find both corporate and personal income taxes to be significant determinants of capital structure. Based on ex post observed summary statistics, across Organisation for Economic Co-Operation and Development (OECD) countries, taxes appear to be as important as other traditional variables in explaining capital structure choices. The results are stronger among corporate tax payers, dividend payers, and companies that are more likely to have an individual as the marginal investor.

Information

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 50 , Issue 3 , June 2015 , pp. 277 - 300
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

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