Corporate Tax Incentives and Capital Structure: New Evidence from UK Firm-Level Tax Returns

Devereux, Michael, Maffini, Giorgia and Xing, Jing (2018) Corporate Tax Incentives and Capital Structure: New Evidence from UK Firm-Level Tax Returns. Journal of Banking and Finance, 88. pp. 250-266.

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Abstract

We investigate how companies' capital structure is affected by corporate income taxes using confidential company-level tax returns for a large sample of UK firms. Exploiting variation in
companies' marginal tax rates, we find a positive and substantial long-run tax effect on leverage. Leverage responds more to decreases in the marginal tax rate, and it responds to changes in the marginal rather than the average tax rate. Most importantly, we find that the marginal tax rate based on tax returns has greater explanatory power for companies' leverage than the marginal
tax rate based on financial statements. Our study suggests that errors in the measurement for tax incentives using financial statements could lead to underestimation of the tax effects on
capital structure.

Item Type: Article
Keywords: Taxation, corporate taxation, capital structure, tax returns
Subject(s): Taxation
Date Deposited: 02 Jan 2018 16:39
Last Modified: 03 Oct 2018 08:37
Funders: ESRC, Leverhulme Trust, University of Oxford John Fell OUP Research Fund
URI: http://eureka.sbs.ox.ac.uk/id/eprint/6708

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