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Pouring Oil on Fire: Interest Deductibility and Corporate Debt
Author:
Pietro Dallari null

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Mr. Nicolas End
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Fedor Miryugin null

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Alexander F. Tieman null

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Mr. Seyed Reza Yousefi null

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Series:
IMF Working Papers
Volume/Issue:
Volume 2018: Issue 257
Language:
English
Publication Date:
07 Dec 2018
DOI:
https://doi.org/10.5089/9781484389102.001
ISBN:
9781484389102
ISSN:
1018-5941
Pages:
42
Keywords:
WP; firm; debt; SME; Leverage; Debt Bias; Tax Policy; Corporate Income Tax; SMEs; Micro data; leverage decision; coefficient estimate; incurred debt; debt firm; debt contract; leverage ratio; estimates of debt bias; long-term debt; strength of debt bias; effect of debt bias; bias coefficient estimate; Capital productivity; Financial statements; Currencies; Europe; Global; interest deductibility; corporate debt; quantile regression; copyright Page; Oil
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper investigates the role of tax incentives towards debt finance in the buildup of leverage in the nonfinancial corporate (NFC) sector, using a large firm-level dataset. We find that so-called debt bias is a significant driver of leverage, for both small and medium-sized enterprises and larger firms, with its effect accounting for about a quarter of leverage. The strength of this effect differs with firm size, the availability of collateral, income and income volatility, cash flow, and capital intensity. We conclude that leveling the playing field between debt and equity finance through tax policy reform would decrease NFC leverage, reducing economic risks posited by leverage.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund