Corporate Tax Aggression and Debt

by Shannon Lin, Naqiong Tong, Alan Tucker

ARTICLE | Journal of Banking and Finance | Vol. 40, 2014

Abstract

We provide a tradeoff model of the capital structure that allows leverage to be a function of a ﬁrm’s choice of tax aggressiveness. The model’s testable implications are supported empirically. Debt use is inversely related to corporate tax aggression for most ﬁrms, and the relation is economically important. This substitution effect is especially evident for ﬁrms exhibiting high tax-shelter prediction scores. The effect attenuates for benign forms of tax avoidance and during the recent credit crisis period. For the most proﬁtable ﬁrms, debt and tax aggression are complements. Our results extend the empirical ﬁndings of Graham and Tucker (2006).　

Keywords: Tax planning, Tax aggression, Leverage, Debt, Capital structure