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Contemporary Accounting Research Vol. 43 No. 2 2026

Debt Concentration and the Tax Sensitivity of Leverage

Xiaoli Hu1,2; Yuehua Li3; Oliver Zhen Li4; Sha Pei5

1 City University of Hong Kong Kowloon Hong Kong · 2 University of Ottawa Ottawa Ontario Canada · 3 Wenzhou‐Kean University Wenzhou China · 4 National University of Singapore Singapore · 5 Shanghai Lixin University of Accounting and Finance Shanghai China

open access

Abstract

A concentrated debt structure can facilitate creditor coordination, which reduces the financial distress cost in a liquidity default but also increases the risk of a strategic default. Debt concentration affects the sensitivity of leverage to tax through these two forces. We show that firms with a more concentrated debt structure are more responsive to state corporate income tax rate increases in increasing financial leverage, suggesting that when the tax rate increases, debt concentration's role in reducing the financial distress cost matters more. The impact of debt concentration on leverage is more pronounced when firms are subject to a high default risk, have low asset redeployability, or have a low liquidation value. Additional debt covenants can facilitate low debt concentration firms to increase leverage after tax rate increases. Our findings suggest that debt concentration is an important factor influencing the tax sensitivity of financial leverage.

DOI
10.1111/1911-3846.70044
Volume
43
Issue
2
Pages
923-954
Language
en
Sources
openalex crossref

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