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Corporate Income Taxation, Leverage at Entry, and the Growth of Entrepreneurial Companies

We study whether corporate income taxation affects the long-term growth of newly incorporated companies through its effect on their choice of leverage at entry. We first document the distribution of initial leverage, which is persistent over several years. We then find that a decrease in corporate income taxation leads to a sizeable decrease in leverage at entry. This effect on initial conditions has long-term effects: an inverted-U relationship exists between leverage at entry and long-term corporate growth, conditional on survival. These effects are economically sizeable, and stronger in countries with better creditor rights and more transparent financial transactions.