Faculty Scholarship 1994 - Present

Tax Code Changes, Tax Shields + Corporate Debt Financing

The DeAngelo-Masulis tax shield hypothesis predicts an inverse relationship between the level of corporate investment-related tax shields and the level of corporate debt financing. The hypothesis has been tested in a number of empirical studies with contradictory results. This study is a new empirical test of the DeAngelo-Masulis hypothesis with a methodology that differs from the methodologies used in the previous studies. To test the hypothesis, we study the effects of the 1981 Economic Tax Recovery Act (ERTA) and the 1986 Tax Reform Act (TRA) on the level of corporate investment-related tax shields and the level of corporate debt financing. Like most previous studies, our findings also provide empirical evidence against the hypothesis.