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Determinants of Corporate Leverage: A Time‐Series Analysis Using U.S. Tax Return Data *
Author(s) -
SHIH MICHAEL S. H.
Publication year - 1996
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1111/j.1911-3846.1996.tb00512.x
Subject(s) - leverage (statistics) , corporate tax , internal revenue , business , revenue , econometrics , operating leverage , economics , actuarial science , accounting , monetary economics , tax avoidance , service (business) , finance , double taxation , marketing , statistics , mathematics , profitability index
. The study examines how the risk of exhausting corporate tax liabilities before deducting interest expense affects corporate leverage. It differs from prior studies in three ways: (1) it uses data compiled by the Internal Revenue Service (IRS) from corporate tax returns rather than accounting data; (2) it measures risk of tax exhaustion more accurately; and (3) it adopts a first‐difference time‐series approach, so that firms act as their own control between adjacent years. These methodological innovations reduce biases caused by measurement error and omitted variables that were present in prior research. The results suggest that, all else being equal, high risk of tax exhaustion reduces firms' use of leverage. As well, the study provides the first evidence that personal taxes significantly affect corporate leverage. The effects on leverage decisions of other variables are also tested and the results are consistent with predictions from prior theoretical work.