Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible.This treatment, other things held constant, tends to encourage the use of debt financing by corporations.

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This statement is true. Since interest paid on debt is tax deductible, corporations may choose to finance their operations and investments through debt rather than through equity (i.e., paying dividends to shareholders). This is because interest payments reduce the taxable income of the corporation, resulting in a lower tax liability. Therefore, debt financing is often more attractive to corporations than equity financing.

Interest Paid by a Corporation Is a Tax Deduction for the Paying