Capital Structure and Tax Status: New Evidence from IPOs

Abstract

Theory suggests that tax status should influence the capital structure policies of firms. Empirical tests, however, have not conclusively validated the theory. Recent research suggests that even if firms optimize their operations to take advantage of the deductibility of interest on debt, other steps taken previously or concurrently with leverage changes may obscure the effect that tax status has on capital structure. By conducting tests on a sample of younger firms with recent initial public offerings, we investigate the effect of tax status on capital structure. Evidence from this sample provides support for the tax-incentive hypothesis.