Implications Of Changes In Tax Rates For Firm Debt Levels: Evidence From The 1986 Tax Reform Act

Abstract

In a recent paper, Jalbert (2002) develops and tests valuations equations for firms that are subject to pass-through taxation and for firms that are subject to double taxation. This work is extended by Jalbert and Dukes (2003) who examine the implications of a zero percent tax rate on dividend income. In this paper, we extend this line of work by developing equations for the implied changes in firm capital structure around a change in tax regime. The results show that firms change their capital structures in predictable ways when tax rates change. These results are important for determining likely changes in firm policy around future tax regime changes.