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The Capital Structure Choice and the Consumption Tax

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  • Andreas Andrikopoulos

Abstract

The consumption tax affects the consumer, but also affects the wealth of the producer because of the tax incidence effect. It affects cash flows from corporate investment, bears influence on capital budgeting choices on investment timing and financing and the respective agency conflicts between shareholders and creditors. In the context of irreversible investment, our model shows that consumption taxation delays investment and precipitates default. Furthermore, we find that the consumption tax has a negative effect on the agency costs of debt, the yield spreads and the optimal leverage ratio. Finally, the model also produces implications for governmental tax policy.

Suggested Citation

  • Andreas Andrikopoulos, 2012. "The Capital Structure Choice and the Consumption Tax," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 3-22.
    • Handle: RePEc:ers:journl:v:xv:y:2012:i:1:p:3-22
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    References listed on IDEAS

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    More about this item

    Keywords

    Real Options; Consumption Tax; Tax Incidence; Agency Conflicts; Capital Structure;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence

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