Debt and Taxes? The Effect of TCJA Interest Limitations on Capital Structure

Author:

Carrizosa Richard1,Gaertner Fabio2ORCID,Lynch Daniel P.34ORCID

Affiliation:

1. University of North Carolina at Charlotte UNITED STATES

2. University of Wisconsin-Madison UNITED STATES

3. University of Wisconsin-Madison 975 University Ave UNITED STATES Madison WI 53706 608-890-1976

4. Accounting 975 University Ave UNITED STATES Madison WI 53706 608-890-1976

Abstract

The Tax Cuts & Jobs Act of 2017 (TCJA) limited the deductibility of interest. Using a difference-in-differences design, we show that following the enactment of the new limitations, affected firms significantly decrease their leverage. Specifically, we find that relative to unaffected U.S. firms, affected firms experience a decrease in leverage of about 7.6 percent of assets, corresponding to about $330 million per firm and $84.8 billion for the treatment sample of 257 firms. These results are driven by decreases in long-term domestic debt and by declines in new issuances rather than debt repayment. We also find firms not currently subject to limitations on interest but subject to future limitations decrease leverage by about half as much as firms currently subject to the limits. Overall our findings document an economically significant effect of recent tax reform on firm behavior and advance understanding of how taxes affect capital structure.

Publisher

American Accounting Association

Subject

Finance,Accounting

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