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Trade credit substitute for debt? Evidence from the TCJA’s interest deduction limitation
|Title:||Trade credit substitute for debt? Evidence from the TCJA’s interest deduction limitation|
Yoo, Il Sun
Interest deductibility limitation
|Abstract:||We examine whether trade credit and traditional debt (bond and bank credit) are substitutes. We use the TCJA’s interest deductibility provision as a source of variation in the after-tax cost of traditional debt. Using a difference-in-differences design, we find that firms subject to the limitation increase trade credit by 7.7% compared to control firms following TCJA. We find similar results using state tax conformity to the interest limitation as a third source of variation. Next, we find that trade credit substitutes for lost debt financing, but that trade credit does not substitute for lost debt monitoring. We also find evidence of increased investment and decreased investment efficiency. From the supplier’s perspective, we find evidence that supplier-firm risk increases due to the interest limitation. Overall, we find evidence that trade credit imperfectly substitutes for traditional debt, leading to investment effects and increased supplier risk.|
|Appears in Collections:||
03 Taxation (TAX)|
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