An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

T. J. Atwood
University of North Texas

Susan E. Cammack
Washburn University

Abstract: 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. 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 onto customers rather than to shareholders. As a result, tax benefits are not significant factors in debt financing decisions for these firms.

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