Taxes and Corporate Policies: Evidence From a Quasi Natural Experiment

  • Author(s): CRAIG DOIDGE, ALEXANDER DYCK
  • Published: Sep 17, 2013
  • DOI: 10.1111/jofi.12101

ABSTRACT

We document important interactions between tax incentives and corporate policies using a “quasi natural experiment” provided by a surprise announcement that imposed corporate taxes on a group of Canadian publicly traded firms. The announcement caused a dramatic decrease in value although prospective tax shields partially offset the losses, adding 4.6% to firm value. In response to changing tax incentives, firms subsequently adjusted their corporate policies. They increased leverage to gain interest tax shields and reversed changes in other policies made to capitalize on tax benefits. The evidence supports the view that taxes are important for corporate decision‐making.

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