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Corporate Debt

Paper Session

Friday, Jan. 3, 2025 2:30 PM - 4:30 PM (PST)

San Francisco Marriott Marquis, Yerba Buena Salon 12 & 13
Hosted By: American Finance Association
  • David Matsa, Northwestern University

Tax Policy, Investment, and Firm Financing: Evidence from the U.S. Interest Limitation

Lucas Goodman
,
U.S. Department of the Treasury
Adam Isen
,
Johns Hopkins University
Jordan Richmond
,
University of Maryland

Abstract

This paper studies the impacts of limiting interest deductions on firms’ investment and
financing choices using U.S. tax data. The 2017 law known as the Tax Cuts and Jobs Act
(TCJA) implemented an interest limitation for big, high-interest firms. Using an event study
design comparing big and small high-interest firms, we rule out economically significant
impacts of the interest limitation on investment and leverage, and find evidence that the
interest limitation led firms to increase their equity issuance. A triple difference design that
accommodates size-varying impacts of other TCJA policy changes yields similar results, as
does a regression discontinuity design focusing on marginal firms that are just large enough to
face the interest limitation. Our results indicate many firms do not use debt as their marginal
source of financing and provide evidence consistent with capital structure models with fixed
leverage adjustment costs. Furthermore, our results suggest limiting interest deductions is
unlikely to have large impacts on investment or to address concerns about rising corporate
debt levels.

The Secular Decline in Private Firm Leverage

Christine Dobridge
,
Federal Reserve Board
Aymeric Bellon
,
University of North Carolina-Chapel Hill
Erik Gilje
,
University of Pennsylvania
Andrew Whitten
,
U.S. Department of the Treasury

Abstract

Using firm-level administrative tax data, we document dramatic reductions in private leverage since the Global Financial Crisis, while leverage among public firms rose during this period. Changing firm characteristics are unable to account for this pattern. Younger and smaller private firms experience large declines in leverage. Reduced leverage among private firms is correlated with lower investment. The decline in private firm leverage and investment is strongly related to plausibly exogenous increases in local area bank capital requirements. Our findings suggest that banks’ credit supply plays a prominent role in explaining the leverage pattern of private firms.

Leveraged Payouts: How Using New Debt to Pay Returns in Private Equity Affects Firms, Employees, Creditors, and Investors

Abhishek Bhardwaj
,
Tulane University
Abhinav Gupta
,
University of North Carolina-Chapel Hill
Sabrina Howell
,
New York University

Abstract

We study the causal effect of a large increase in firm leverage. Our setting is dividend recapitalizations in private equity (PE), where portfolio companies take on new debt to pay investor returns. After accounting for positive selection into more debt, we show that large leverage increases make firms much riskier, dramatically raising exit and bankruptcy rates but also IPOs. The debt-bankruptcy relationship is in line with Altman-Z model predictions for private firms. Dividend recapitalizations increase deal returns but reduce: (a) wages among surviving firms; (b) pre-existing loan prices; and (c) fund returns, which seems to reflect moral hazard via new fundraising. These results suggest negative implications for employees, pre-existing creditors, and investors.

Discussant(s)
Mara Faccio
,
Purdue University
Benjamin Iverson
,
Brigham Young University
Shai Bernstein
,
Harvard University
JEL Classifications
  • G3 - Corporate Finance and Governance