Incremental financing decisions and time-series variation in personal taxes on equity income

Dan S. Dhaliwal, Merle M. Erickson, Linda K. Krull

Research output: Contribution to journalArticlepeer-review

9 Scopus citations


This study investigates whether changes in personal tax rates on dividends and capital gains affect firms’ incremental financing decisions. The evidence in this study suggests that following the 1997 and 2003 Tax Acts, which decreased tax rates on equity income, firms are less likely to issue debt relative to equity, consistent with the hypothesis that decreases in tax rates on equity income decrease the tax benefits of debt. Further, the magnitude of this effect varies predictably with dividend yield, a proxy for the proportion of equity income taxed at capital gain tax rates versus dividend tax rates. The magnitude of this effect is also decreasing in institutional ownership, a proxy for the probability that the marginal investor is tax exempt. This paper contributes to the literature that examines the effect of taxes on corporate financing decisions.

Original languageEnglish (US)
Pages (from-to)1-26
Number of pages26
JournalJournal of the American Taxation Association
Issue number1
StatePublished - 2007
Externally publishedYes


  • Capital gain taxes
  • Capital structure
  • Corporate taxes
  • Dividend taxes

ASJC Scopus subject areas

  • Accounting
  • Finance


Dive into the research topics of 'Incremental financing decisions and time-series variation in personal taxes on equity income'. Together they form a unique fingerprint.

Cite this