Tax Clienteles and Debt Maturity

Abstract

We examine the proposition that the expected value of future interest tax shields affects firms' preferences for long-term vs. short-term debt. We extend prior work that has focused on incremental debt issuances (Newberry and Novack 1999; Guedes and Opler 1996) by examining the maturity structure reflected in the portfolio of firms' outstanding debt at year-end. Thus, our study tests a wider range of capital structure activities and includes a much larger sample of firms than examined in prior studies. Our results indicate that firms with high marginal tax rates use more long-term debt than do firms with low marginal tax rates. These findings are consistent with the existence of tax clienteles for financing with debt of different maturities.

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