Journal of Financial and Quantitative Analysis Vol. 61 No. 4 2026
Debt and Taxes: The Role of Tax Avoidance
Abstract
Empirically, the effect of corporate tax rates on leverage has been smaller than expected based on trade-off theory. In this article, I show that tax avoidance functions as a non-debt tax shield, reducing the benefits of the debt tax shield. I find that higher tax rates cause higher non-debt tax avoidance, which crowds out the debt tax shield. Moreover, I show that the strength of the relationship between debt and tax rates depends on the level of tax avoidance. A 1-standard-deviation higher tax rate implies 2.8% higher leverage for low tax avoidance firms, but has a negative effect for high tax avoidance firms.
- DOI
- 10.1017/s0022109025102500
- Volume
- 61
- Issue
- 4
- Pages
- 2007-2032
- Language
- en
- Sources
- openalex crossref