Tax rates and corporate decision-making

Journal Article (Journal Article)

We survey companies and find that many use incorrect tax rate inputs into important corporate decisions. Specifically, many companies use an average tax rate (the GAAP effective tax rate, ETR) to evaluate incremental decisions, rather than using the theoretically correct marginal tax rate. We find evidence consistent with behavioral biases (heuristics, salience) and managers' educational backgrounds affecting these choices. We estimate the economic consequences of using the theoretically incorrect tax rate and find that using the ETR for capital structure decisions leads to suboptimal leverage choices and using the ETR in investment decisions makes firms less responsive to investment opportunities.

Full Text

Duke Authors

Cited Authors

  • Graham, JR; Hanlon, M; Shevlin, T; Shroff, N

Published Date

  • September 1, 2017

Published In

Volume / Issue

  • 30 / 9

Start / End Page

  • 3128 - 3175

Electronic International Standard Serial Number (EISSN)

  • 1465-7368

International Standard Serial Number (ISSN)

  • 0893-9454

Digital Object Identifier (DOI)

  • 10.1093/rfs/hhx037

Citation Source

  • Scopus