Abstract DeAngelo and Masulis (1980) predict that in cross-sectional analysis firms with higher investment-related lax shields (holding before-tax earnings constant) will employ less debt in their capital structure due to the positive relation between investment- related tax shields and the probability of losing the deductibility of debt tax shields. This study finds strong empirical support for this substitution effect hypothesis after controlling for the following: the probability of losing the immediate deductibility of tax shields, the debt securability effect, the production technology effect, and other factors identified in prior cross-sectional studies of the determinants of capital structure.
Dhaliwal et al. (Sun,) studied this question.