Taxes and Private Firms’ Capital Structure Choices

Using limitations to the deductibility of interest payments triggered by the introduction of interest ceiling rules globally, we show that affected private firms reduce leverage relative to unaffected firms. In support of a causal effect of taxes on corporate capital structure choices, we show that the results hold for firms near the thresholds triggering the limitations, in a propensity score matched sample, and in countries required to adopt the interest ceiling rules. In contrast, falsification tests show no reduction in leverage for affected firms around pseudo-reform years. Furthermore, within a country, firms with a higher fraction of nondeductible interest payments are less responsive to tax rate changes. More broadly, across 93 countries, we document that private firms tend to decrease leverage in response to tax rate cuts and increase leverage in response to corporate tax rate hikes.