Pouring Oil on Fire: Interest Deductibility and Corporate Debt

Author/Editor:

Pietro Dallari ; Nicolas End ; Fedor Miryugin ; Alexander F. Tieman ; Reza Yousefi

Publication Date:

December 7, 2018

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

This paper investigates the role of tax incentives towards debt finance in the buildup of leverage in the nonfinancial corporate (NFC) sector, using a large firm-level dataset. We find that so-called debt bias is a significant driver of leverage, for both small and medium-sized enterprises and larger firms, with its effect accounting for about a quarter of leverage. The strength of this effect differs with firm size, the availability of collateral, income and income volatility, cash flow, and capital intensity. We conclude that leveling the playing field between debt and equity finance through tax policy reform would decrease NFC leverage, reducing economic risks posited by leverage.

Series:

Working Paper No. 18/257

English

Publication Date:

December 7, 2018

ISBN/ISSN:

9781484389102/1018-5941

Stock No:

WPIEA2018257

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

42

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