TY  - JOUR
AU  - Heider, Florian
AU  - Ljungqvist, Alexander
TI  - As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from Exogenous State Tax Changes
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 18263
PY  - 2012
Y2  - July 2012
DO  - 10.3386/w18263
UR  - http://www.nber.org/papers/w18263
L1  - http://www.nber.org/papers/w18263.pdf
N1  - Author contact info:
Florian Heider
Kaiserstrasse 29  D-60311
Frankfurt am Main,  Germany
Europe
E-Mail: florian.heider@ecb.europa.eu

Alexander Ljungqvist
Stockholm School of Economics
Box 6501
SE-113 83 Stockholm, Sweeden
E-Mail: alexander.ljungqvist@hhs.se
M1  - published as Florian Heider, Alexander Ljungqvist. "As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from State Tax Changes," in Viral V. Acharya, Heitor Almeida, and Malcolm Baker, organizers, "New Perspectives on Corporate Capital Structure" Elsevier, Journal of Financial Economics 118(3) (2015)

AB  - We use a natural experiment in the form of 121 staggered changes in corporate income tax rates across U.S. states to show that tax considerations are a first-order determinant of firms' capital structure choices. Over the period 1990-2011, firms increase long-term leverage by 104 basis points on average (or $32.5 million in extra debt) in response to an average tax increase of 131 basis points. Contrary to static trade-off theory, the tax sensitivity of leverage is asymmetric: firms do not reduce leverage in response to tax cuts. Using treatment reversals, we find this to be true even within-firm: tax increases that are later reversed nonetheless lead to permanent increases in a firm's leverage - an unexpected and novel form of hysteresis. Our findings are robust to various confounds such as unobserved variation in local business conditions, union power, or unemployment risk. Treatment effects are heterogeneous and confirm the tax channel: tax sensitivity is greater among profitable and investment-grade firms which respectively have a greater marginal tax benefit and lower marginal cost of issuing debt.
ER  -