Premium
Debt, Leases, Taxes, and the Endogeneity of Corporate Tax Status
Author(s) -
Graham John R.,
Lemmon Michael L.,
Schallheim James S.
Publication year - 1998
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.55404
Subject(s) - endogeneity , monetary economics , economics , corporate tax , tax rate , corporate finance , debt , business , value added tax , finance , public economics , tax avoidance , econometrics
We provide evidence that corporate tax status is endogenous to financing decisions, which induces a spurious relation between measures of financial policy and many commonly used tax proxies. Using a forward‐looking estimate of before‐financing corporate marginal tax rates, we document a negative relation between operating leases and tax rates, and a positive relation between debt levels and tax rates. This is the first unambiguous evidence supporting the hypothesis that low tax rate firms lease more, and have lower debt levels, than high tax rate firms.