Faculty Scholarship 1994 - Present

Industry Classification, Tax Shields, and Financial Leverage

The DeAngelo-Masulis tax shield hypothesis predicts that industries with high (low) levels of investment-related tax shields should have low (high) levels of financial leverage. This hypothesis has been tested in two previous studies with conflicting results. Our study presents additional empirical evidence on the DeAngelo-Masulis tax shield hypothesis at the industry level by using a different methodology, a larger sample, a different time period, and investment- related and debt-related and debt-related tax shield proxy measures suggested by a recent study. Our findings indicate that the level of investment-related tax shield proxy measures suggested by a recent study. Our findings indicate that the level of investment-related tax shields and the level of debt-related tax shields and the level of debt-related tax shields are not negatively related at the industry level.