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Debt and Taxes: The Role of Tax Avoidance

Peter Brok

Journal of Financial and Quantitative Analysis2026https://doi.org/10.1017/s0022109025102500article
FT50AJG 4ABDC A*
Weight
0.50

Abstract

Empirically, the effect of corporate tax rates on leverage has been smaller than expected based on trade-off theory. In this article, I show that tax avoidance functions as a non-debt tax shield, reducing the benefits of the debt tax shield. I find that higher tax rates cause higher non-debt tax avoidance, which crowds out the debt tax shield. Moreover, I show that the strength of the relationship between debt and tax rates depends on the level of tax avoidance. A 1-standard-deviation higher tax rate implies 2.8% higher leverage for low tax avoidance firms, but has a negative effect for high tax avoidance firms.

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https://doi.org/https://doi.org/10.1017/s0022109025102500

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@article{peter2026,
  title        = {{Debt and Taxes: The Role of Tax Avoidance}},
  author       = {Peter Brok},
  journal      = {Journal of Financial and Quantitative Analysis},
  year         = {2026},
  doi          = {https://doi.org/https://doi.org/10.1017/s0022109025102500},
}

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Debt and Taxes: The Role of Tax Avoidance

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Evidence weight

0.50

Balanced mode · F 0.40 / M 0.15 / V 0.05 / R 0.40

F · citation impact0.50 × 0.4 = 0.20
M · momentum0.50 × 0.15 = 0.07
V · venue signal0.50 × 0.05 = 0.03
R · text relevance †0.50 × 0.4 = 0.20

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