The effects of taxes and stock repurchases on domestic and multinational companies’ debt levels

Abstract

AbstractIn past decades, corporate debt levels have risen to historical highs and remained elevated. This study examines one of the key reasons that caused the high debt levels––income taxes. Specifically, this study contrasts the effects of tax planning on corporate debt levels in domestic companies (DCs) and multinational companies (MNCs) in the United States. It also explores how stock repurchase enhances such effects. The findings show that the association between debts and the outcomes of tax of planning is stronger in DCs than in MNCs. This suggests that DCs are more likely to use debt tax shields than MNCs. In addition, compared to tax‐efficient DCs, tax‐efficient MNCs are more likely to borrow in order to repurchase stock, resulting high debt levels. Moreover, the study provides evidence that the credit rating adjusts DCs’ and MNCs’ credit ratings when they raise debts to repurchase stocks.