DEBT, LEASES, TAXES, AND THE ENDOGENEITY OF CORPORATE-TAX STATUS

We provide evidence that corporate tax status is endogenous to financi ng decisions, which induces a spurious relation between measures of fi nancial policy and many commonly used tax proxies. Using a forward-loo king estimate of before-financing corporate marginal tax rates, we doc ument a negative relation between operating leases and tax rates, and a positive relation between debt levels and tax rates. This is the fir st unambiguous evidence supporting the hypothesis that low tax rate fi rms lease more, and have lower debt levels, than high tax rate firms.