Debt Concentration and the Tax Sensitivity of Leverage
ABSTRACT A concentrated debt structure can facilitate creditor coordination, which reduces the financial distress cost in a liquidity default but also increases the risk of a strategic default. Debt concentration affects the sensitivity of leverage to tax through these two forces. We show that firms with a more concentrated debt structure are more responsive to state corporate income tax rate increases in increasing financial leverage, suggesting that when the tax rate increases, debt concentration's role in reducing the financial distress cost matters more. The impact of debt concentration on leverage is more pronounced when firms are subject to a high default risk, have low asset redeployability, or have a low liquidation value. Additional debt covenants can facilitate low debt concentration firms to increase leverage after tax rate increases. Our findings suggest that debt concentration is an important factor influencing the tax sensitivity of financial leverage.
Authors
- Oliver Zhen Li (ORCID: https://orcid.org/0000-0002-7770-2444)
- Xiaoli Hu (ORCID: https://orcid.org/0000-0002-6110-9849)
- Sha Pei
- Yuehua Li (ORCID: https://orcid.org/0000-0003-3010-0750)
Institutions
- Shanghai Lixin University of Accounting and Finance (CN)
- University of Ottawa (CA)
- National University of Singapore (SG)
- City University of Hong Kong (HK)
- Wenzhou-Kean University (CN)
Publication Details
- Journal
- Contemporary Accounting Research
- Published
- 2026-04-13
- DOI
- https://doi.org/10.1111/1911-3846.70044
- Primary Topic
- Corporate Finance and Governance
- Type
- article
- Field-Weighted Citation Impact
- 0.00