Using a difference-in-differences design, we show that new limitations on the deductibility of interest, enacted as part of the Tax Cuts & Jobs Act of 2017 (TCJA), significantly decrease corporate leverage. Specifically, we find that relative to unaffected U.S. firms, affected firms experience a decrease in leverage of 3.5% of assets; corresponding to about $156 million per firm and $38 billion for the whole treatment sample. We find similar results when benchmarking our treatment firms to a control group of Canadian firms that would be subject to the limitation had they been headquartered in the U.S. Robustness tests suggest our results are not driven by other elements of tax reform. We also find that firms not currently subject to limitations on interest but which are likely subject to future limitations decrease leverage by about half as much as firms currently subject to interest limits. Overall, we find that the new interest limitations significantly alter the market for corporate debt.
Carrizosa, Richard and Gaertner, Fabio B. and Lynch, Dan, Debt and Taxes? The Effect of TCJA Interest Limitations on Capital Structure (May 31, 2019). Available at SSRN: https://ssrn.com/abstract=3397285