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Do Taxes Affect Corporate Financing Decisions?
Author(s) -
MacKIEMASON JEFFREY K.
Publication year - 1990
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/j.1540-6261.1990.tb03724.x
Subject(s) - equity (law) , economics , debt , explanatory power , corporate finance , tax rate , corporate tax , debt financing , finance , monetary economics , business , tax reform , public economics , tax avoidance , philosophy , epistemology , political science , law
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.