THE IMPACT OF TAX POLICY AND COMPETITION ON FIRM CAPITAL STRUCTURE, INVESTMENT, AND LEASING BEHAVIOR (ECONOMIC GROWTH, LIABILITY, LOSS)

Policymakers recognize the importance of investment to economic growth and have used tax policy to stimulate capital accumulation. Although the theoretical predictions of tax incentives are clear--firms should increase their use of subsidized assets--empirical estimates of the effects of tax policy on investment are often insignificant. Chapter One expands upon previous literature by employing a more complete formulation of investment, which includes not only capital purchases, but also leasing. In recent years, leasing has grown to about one-third of fixed equipment investment, and its exclusion from studies of capital formation bias empirical results. Chapter One also analyzes the differential effects of tax policy on firms with tax liability and in tax loss status. Chapter One concludes that leasing is highly responsive to changes in tax incentives for taxable firms and even more so for tax loss firms. I demonstrate that total capital accumulation increases for all firms in response to increased tax incentives. The prior literature ignored the leasing component of capital accumulation and has underestimated the impact of tax policy on capital accumulation. Incorporating leasing in the investment formulation increases the estimated response to tax incentives by 50%.; Chapter Two investigates how taxes affect the capital structure decisions of firms. Chapter One suggests that changes in the user cost of capital change the real investment decisions of firms and this chapter investigates the demand effect these investment decisions have on the financing decisions of firms, including leasing financing.; Chapter Three investigates the impact of increases in import competition on the debt levels of firms. Using import competition as the measure of competition allows the use of exchange rates as instruments. Assuming that changes in exchange rates are exogenous to firm level capital structure decisions, this method produces exogenous changes in competition. I use a panel of COMPUSTAT firms and the instrumented measure of foreign competition to examine how exogenous variation in competition leads to changes in the leverage rates of firms. By exploiting this exogenous variation I am able to obtain a clean estimate of the negative relationship between product market competition and debt rates.