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I am grateful to Michael Keen, Victoria Perry and the participants at the IMF Workshop on “Tax-Induced Debt Bias” on March 4, 2011 for useful comments.
In an earlier paper, Givoly and others (1992) use firm-specific tax rates, based on micro data (computed as taxes paid over pre-tax income). They then estimate the impact of these taxes on incremental debt. To circumvent endogeneity, they take the lagged value of the average tax. They report a positive effect on incremental debt.
In an earlier paper, Gentry (1994) already showed that publicly traded partnerships in the oil and gas exploration industry in the U.S. (which are not subject to CIT) feature significantly lower debt levels than similar firms that are run in the corporate form.
Besides the marginal tax rate based on the federal CIT, Graham also uses state CIT rates. These coefficients are larger and run up to 0.46. However, Graham notes that due to measurement problems, this result is unreliable. Where therefore do not include this in our meta database
The explanation might be that small firms rely more heavily on credit from insiders, who are relatively responsive to tax. Intermediate firms more likely face credit constraints than large firms, who can issue corporate bonds. This makes the latter more responsive to tax.
They also report different effects for directly and indirectly held subsidiaries. We only take the results for directly held firms.
Huizinga and others (2008) include two tax terms simultaneously in their regression: the marginal tax should capture effects on third-party debt, and the tax differential between the parent and its subsidiaries should capture effects on intracompany debt within the multinational firm. We include both terms in our meta sample, where the former is referred to as an elasticity applying to third-party debt and the latter an elasticity applying to intracompany debt.
The results of Overesch and Wamser (2006) suggest that elasticities are especially large for holding companies, while those for other firms are not particularly large. Mintz and Weichenrieder (2010) report larger effects for wholly-owned than for partially-owned subsidiaries.
For studies reporting separate elasticities for intra-company debt, third-party debt and total debt, we take three elasticities as they are from independent data (Altshuler and Grubert, 2003; Desai, and others 2004; Huizinga and others 2008; Mintz and Weichenrieder, 2010).
We get the same insignificant result if we take the dummy for publication in the regression.