TAXES AND CORPORATE-DEBT POLICY IN CANADA - AN EMPIRICAL-INVESTIGATION

This paper explores the implications of asymmetric corporate taxes for firms' debt policy. The focus is on the effects of two dynamic tax pr ovisions, loss carry-forward and loss carry-back, on net debt issues. An effective tax variable is first estimated using a Tobit framework, accounting for the fact that firms' losses for tax purposes are censor ed. This effective tax variable and other explanatory factors are empl oyed to explain net debt issues. Heteroscedasticity caused by the 'fir m size effect' is also corrected. Using a panel of 128 firms between 1 979 and 1989, this paper finds that corporate taxes have significant e ffects on firms' debt policy.