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.
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.
Discussant: Benjamin Iverson, Brigham Young University
Abhinav Gupta, University of North Carolina-Chapel Hill
Sabrina Howell, New York University
Abstract: We assess how debt affects firm, employee, investor, and creditor outcomes in the setting of dividend recapitalizations among private equity (PE)-backed firms. Debt is isolated in these deals because ownership remains constant, leverage increases substantially, and loan proceeds are paid to a PE fund rather than deployed within the firm. We show that PE firms select high-quality deals for dividend recapitalizations. Causal analysis finds that the new debt makes firms riskier, dramatically raising bankruptcy and failure rates, but also increasing IPOs and spurring revenue growth. It also reduces wages and fund returns, potentially to employees’ and limited partner investors’ detriment.
