Do Taxes Affect Public Utility Company Debt-Financing Decisions?
Cannack, Susan E.
Washburn University. School of Business
Kaw Valley Bank
This study examines whether tax incentives influence debt-financing decisions in the public utility industry. We find no relation between debt financing decisions and tax incentives for the public utility industry as a whole; however, we find a significant positive relation for public utility firms operating in very favorable regulatory environments, as indicated by the Regulatory Research Associates' regulatory environment rankings of Above Average/Strong and Above Average/Mid-Range. Our results suggest that tax incentives influence debt-financing decisions for public utility firms operating in very favorable regulatory environments because these firms are able to pass tax benefits through to shareholders. For firms operating in other regulatory environments, tax benefits arising from debt financing are likely to be passed on to customers rather than to shareholders. As a result, tax benefits are not significant factors in debt financing decisions for these firms. We also find similar results for levels of short-term debt financing.