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Agency costs, taxes and debt: The UK evidence

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  • M. Ameziane Lasfer

Abstract

This paper provides an empirical examination of the impact of the corporation tax and agency costs on firms' capital structure decisions. Our evidence suggests that the agency costs are the main determinants of corporate borrowing. Consistent with the agency theory, we find that firms that have fewer growth options have more debt in their capital structure. Moreover, our results show that debt mitigates the free cash flow problem and that firms that are more likely to be diversified and less prone to bankruptcy are highly geared. the negative effect of insider shareholding on leverage disappears, however; when all the agency mechanisms are accounted for. In addition, we find that, in the long run, companies that are tax exhausted exhibit significantly lower debt ratios than tax-paying firms. However, in the short run, firms' capital structure decisions are not affected by taxation. Copyright Blackwell Publishers Ltd. 1995.

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Bibliographic Info

Article provided by European Financial Management Association in its journal European Financial Management.

Volume (Year): 1 (1995)
Issue (Month): 3 ()
Pages: 265-285

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Handle: RePEc:bla:eufman:v:1:y:1995:i:3:p:265-285

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Cited by:
  1. Raquel Ortega Argiles & Rosina Moreno Serrano & Jordi Surinach Caralt, 2004. "Ownership structure and innovation: Is there a real link," Working Papers in Economics 111, Universitat de Barcelona. Espai de Recerca en Economia.
  2. Suhaila, Mat Kila & Wan Mahmood, Wan Mansor, 2008. "Capital Structure and Firm Characteristics: Some Evidence from Malaysian Companies," MPRA Paper 14616, University Library of Munich, Germany.
  3. Viet Anh Dang, 2005. "Testing the Trade-off and Pecking Order Theory: Some UK Evidence," Money Macro and Finance (MMF) Research Group Conference 2005 28, Money Macro and Finance Research Group.
  4. Mustafa Caglayan & Abdul Rashid, 2013. "The Response of Firms' Leverage to Risk: Evidence from UK Public versus Non-Public ManufacturingFirms," CFI Discussion Papers 1302, Centre for Finance and Investment, Heriot Watt University.
  5. Goergen, Marc & Renneboog, Luc, 2001. "Investment policy, internal financing and ownership concentration in the UK," Journal of Corporate Finance, Elsevier, vol. 7(3), pages 257-284, September.
  6. Pawlina, G. & Renneboog, L.D.R., 2005. "Is Investment-Cash Flow Sensitivity Caused by the Agency Costs or Asymmetric Information? Evidence from the UK," Discussion Paper 2005-23, Tilburg University, Center for Economic Research.
  7. Lars P. Feld & Jost Henrich Heckemeyer & Michael Overesch, 2011. "Capital Structure Choice and Company Taxation: A Meta-Study," CESifo Working Paper Series 3400, CESifo Group Munich.
  8. Faris Nasif Al-Shubiri, 2011. "Capital Structure and Market Power: Evidence from Jordanian Banks," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 9(3), pages 289-310.
  9. Aggarwal, Raj & Kyaw, NyoNyo Aung, 2010. "Capital structure, dividend policy, and multinationality: Theory versus empirical evidence," International Review of Financial Analysis, Elsevier, vol. 19(2), pages 140-150, March.
  10. Pablo de Andrés-Alonso & Valentín Azofra-Palenzuela & Juan A. Rodríguez-Sanz, 2000. "Endeudamiento, oportunidades de crecimiento y estructura contractual: un contraste empírico para el caso español," Investigaciones Economicas, Fundación SEPI, vol. 24(3), pages 641-679, September.
  11. Faccio, Mara & Lasfer, M. Ameziane, 2000. "Do occupational pension funds monitor companies in which they hold large stakes?," Journal of Corporate Finance, Elsevier, vol. 6(1), pages 71-110, March.
  12. A. A. Bevan & J. Danbolt, 2004. "Testing for inconsistencies in the estimation of UK capital structure determinants," Applied Financial Economics, Taylor & Francis Journals, vol. 14(1), pages 55-66.

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