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Taxes, Capital Structure Choices, and Equity Value

  • Mara Faccio and Jin Xu
Abstract

We use a multitude of tax reforms across the Organisation for Economic Co-Operation and Development (OECD) countries as natural experiments to estimate the market value of the tax benefits of debt financing. We report time-series evidence that tax reforms are followed by large changes in the value of corporate equity. However, the impact of tax reforms is greatly mitigated by the presence of leverage. The value of debt tax savings is greater among top taxpayers, among highly profitable firms, and in countries where tax laws are more strongly enforced. Importantly, the value of debt tax savings is in line with the benchmark implied by a traditional approach.

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Corresponding author
* Faccio, mfaccio@purdue.edu, Purdue University Krannert School of Management, Asian Bureau of Finance and Economic Research (ABFER), European Corporate Governance Institute (ECGI), and National Bureau of Economic Research (NBER); Xu (corresponding author), xujin@vt.edu, Virginia Polytechnic Institute and State University Pamplin College of Business.
Footnotes
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1

We thank an anonymous referee, Najah Attig, John Graham, Kate Holland, Yeejin Jang, E. Han Kim, Paul Malatesta (the editor), Vikram Nanda, Bill O’Brien, Abraham Ravid, Bohui Zhang, and seminar participants at the 2014 NBER Summer Institute, the 2014 Conference on Financial Economics and Accounting at Georgia State University, the 2015 American Finance Association meetings, the 2016 Tsinghua Finance Workshop, Aalto University, the University of Chicago, the Hanken School of Economics, Pennsylvania State University, Purdue University, Saint Mary’s University (Halifax), the University of Arkansas, the University of Illinois at Chicago, and Virginia Tech for comments.

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Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
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