Do Taxes Affect Corporate Financing Decisions?

Authors:
  • MNMac K I E‐ M A S O N
    Mac K I E‐ M A S O N
  • JKJeffrey K.
    Jeffrey K.
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Abstract
This paper provides clear evidence of substantial tax effects on the choice between issuing debt or equity; most studies fail to find significant effects. The relationship between tax shields and debt policy is clarified. Other papers miss the fact that most tax shields have a negligible effect on the marginal tax rate for most firms. New predictions are strongly supported by an empirical analysis; the method is to study incremental financing decisions using discrete choice analysis. Previous researchers examined debt/equity ratios, but tests based on incremental decisions should have greater power.