Accounting Papers

Document Type

Journal Article

Date of this Version

11-2010

Publication Source

Journal of Financial Economics

Volume

98

Issue

2

Start Page

195

Last Page

213

DOI

10.1016/j.jfineco.2010.04.005

Abstract

We re-examine the claim that many corporations are underleveraged in that they fail to take full advantage of debt tax shields. We show prior results suggesting underleverage stems from biased estimates of tax benefits from interest deductions. We develop improved estimates of marginal tax rates using a non-parametric procedure that produces more accurate estimates of the distribution of future taxable income. We show that additional debt would provide firms with much smaller tax benefits than previously thought, and when expected distress costs and difficult-to-measure non-debt tax shields are also considered, it appears plausible that most firms have tax-efficient capital structures.

Copyright/Permission Statement

© 2010. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0

Keywords

debt, capital structure, marginal tax rates, taxes

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Date Posted: 27 November 2017

This document has been peer reviewed.