Does Removing Interest Tax Shield Decrease Corporate Debt? Evidence From The 2017 US Tax Reform

Abstract

Tax advantage of debt has been the cornerstone of corporate finance since the beginning. Nonetheless, providing empirical evidence for the relation between tax incentives and corporate debt has been challenging because of a variety of endogeneity issues. This paper uses a unique feature of the 2017 US tax reform to study this relation. The reform reduces the tax advantage of debt for all but a group of exempted firms. Firms that lose interest deductions significantly reduce corporate debt in the year following the tax reform.