Classical corporate taxation typically favours debt finance over equity. The resulting bias leads .rms to be over-leveraged. The Allowance for Corporate Equity (ACE) tries to stop such bias by granting a deduction on the cost of equity. The implementation of that princple however differs between countries. In this paper we investigate three recent ACE reforms which occurred in Latvia, Italy and Portugal respectively. Using a broad range of evaluation methods and a large dataset at .rm level, we analyse the possible debt-reducing e¤ect of an ACE. From a methodological point of view we innovate by relating the di¤erence-in-di¤erences (DID) method, which captures the e¤ect of the treatment, i.e. the sole existence of an ACE, and the Effective Marginal Tax Rate (EMTR), which enables to measure the intensity of that treatment. For both Italy and Portugal we .nd a decrease of .nancial leverage decreases by by 1-2 %, while, counterintuitively, the leverage increases in Latvia. Another interesting feature is that, though Italy and Latvia show a larger leverage cut among large .rms, small firms are more affected by the reform in Portugal.

Keywords: Leverage; Corporate debt bias; Allowance for Corporate

Equity (ACE); Quasi natural experiment; Differences in Differences (DID); Effective Marginal Tax Rate (EMTR)

JEL: C32, F23, H25, H32, K34