Using large shareholder characteristics to analyze investor-level tax effects on corporate leverage

Using a sample of public European companies and multiple countries’ tax rate changes, we examine the impact of shareholder-level tax incentives on corporate capital structure. We conjecture and find that the largest shareholder’s tax incentive for debt positively influences leverage. We also find that the second-largest shareholder’s tax incentive for debt is incrementally relevant for leverage. Tax incentive heterogeneity between the two largest shareholders reduces the positive impact of the largest shareholder’s tax incentive on leverage. Finally, we document that the relevance of the largest shareholder’s tax incentive for capital structure decisions is increasing in the level of voting rights power.