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This paper analyzes the relationship between corporate taxation, firm age and debt. The authors adapt a standard model of capital structure choice under corporate taxation, focusing on the financing and investment decisions a firm is typically faced with. The model suggests that the debt ratio is positively associated with the corporate tax rate, and negatively with firm age. Further, they predict that the tax-induced advantage of debt is more important for older than for younger firms. To test these hypotheses empirically, they use a cross-section of 405,000 firms from 35 European countries and 126 NACE 3-digit industries. In line with previous research, they find that a firm's debt ratio increases with the corporate tax rate.
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