We examine whether tax-aggressive firms respond differently to interest limitation rules (ILRs) compared to the non-aggressive ones and whether, given the election right, the former prefer a certain type of ILRs (safe haven approach that restricts internal debt ratio versus earnings stripping rules) in order to maintain their tax-aggressive status. We exploit a quasi-natural experiment provided by the introduction of a hybrid system of ILRs in Poland. We use a unique data set consisting of micro-level information from tax authorities matched with Amadeus and complemented with more granular data from individual financial statements. We apply triple difference and logistic panel regressions. We do not find that the leverage responses of tax-aggressive and non-aggressive firms are statistically different among these two groups. However, the regressions based on tax return data show that tax-aggressive firms are more likely to escape earnings stripping rules and choose the traditional safe haven approach instead.

This paper studies the impacts of limiting interest deductions on firms’ investment and financing choices using U.S. tax data. The 2017 law known as TCJA implemented an interest limitation for big, high-interest firms. Using an event study design comparing big and small high-interest firms, we rule out economically significant impacts of the limitation on investment and leverage, and find evidence that the it led firms to increase equity issuance. A triple difference design that accommodates size-varying impacts of other policy changes yields similar results, as does a regression discontinuity design focusing on marginal firms just large enough to face the limitation. Our results indicate many firms do not use debt as their marginal source of financing and provide evidence consistent with capital structure models with fixed leverage adjustment costs. Furthermore, they suggest limiting interest is unlikely to have large impacts on investment or address concerns about rising corporate debt levels.