Capital Structure, Corporate Taxation and Firm Age


  • Submitted November 2010.

  • The authors are grateful to Simon Loretz, Harald Oberhofer and seminar participants at the annual conferences of the International Institute of Public Finance in Maastricht, the European Economic Association in Barcelona, the Spanish Economic Association in Zaragoza, the Austrian Economic Association in Linz, the Universities of Innsbruck and Salzburg as well as the joint workshop of the Vienna University of Economics and Business and the Oxford Centre for Business Taxation in Vienna. Financial support from the Jubiläumsfonds of the Austrian National Bank (OeNB, project no. 12459) is gratefully acknowledged.


This paper analyses the relationship between corporate taxation, firm age and debt. We adapt a standard model of capital structure choice under corporate taxation, focusing on the financing and investment decisions typically faced by a firm. Our model suggests that the debt ratio is associated positively with the corporate tax rate and negatively with firm age. Further, we predict that the tax-induced advantage of debt is more important for older firms than for younger ones. To test these hypotheses empirically, we use a cross-section of around 405,000 firms from 35 European countries and 127 NACE three-digit industries. In line with previous research, we find that a firm's debt ratio increases with the corporate tax rate. Further, we observe that older firms exhibit smaller debt ratios than their younger counterparts. Finally, consistent with our theoretical model, we find a positive interaction between corporate taxation and firm age, indicating that the impact of corporate taxation on debt increases over a firm's lifetime.