Review of Accounting Studies

, Volume 22, Issue 2, pp 903–932 | Cite as

Book-tax conformity and capital structure

  • Bradley Blaylock
  • Fabio B. Gaertner
  • Terry Shevlin
Article

Abstract

We examine the effect of increased book-tax conformity on corporate capital structure. Prior studies document a decrease in the informativeness of accounting earnings for equity markets resulting from higher book-tax conformity. We argue that the decrease in earnings informativeness impacts equity holders more than debt holders because of the differences in payoff structures between debt and equity investments such that increases in book-tax conformity lead to increases in firms’ reliance on debt capital. We exploit a natural experiment in the U.S. and find that firms facing an increase in required book-tax conformity increase leverage relative to other firms. We also provide evidence of an increase in the cost of equity (but not of debt) capital for firms facing an increase in required book-tax conformity, relative to control firms, and show that these increases in cost of equity capital are positively associated with an increase in leverage. Our findings are consistent with firms substituting away from equity and toward more debt in the presence of higher book-tax conformity.

Keywords

Book-tax conformity Leverage Capital structure 

JEL codes

H20 H25 M41 

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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.Price College of BusinessUniversity of OklahomaNormanUSA
  2. 2.Wisconsin School of BusinessUniversity of Wisconsin-MadisonMadisonUSA
  3. 3.Merage School of BusinessUniversity of California-IrvineIrvineUSA

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