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Corporate Tax Reforms and Financial Choices: An Empirical Analysis

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  • Maria Elena Bontempi

    (University of Ferrara)

  • Silvia Giannini

    (University of Bologna)

  • Roberto Golinelli

    (University of Bologna)

Abstract

This paper assesses the effects that two different types of corporate tax reforms, recently implemented in Italy by two different Governments, have had on the debt choices of companies, In order to do so, we combine the information provided by a micro-simulation corporate tax-model, with an empirical model of companies' financial choices (a modified pecking order model), and apply this analytical framework to a panel of Italian manufacturing companies. The main results suggest that: (a) the tax system affects corporate leverage both through the relative cost of debt capital, and through cash flow; (b) the first reform, which operated mainly by reducing the relative cost of equity capital and was less costly for the Government, turns out to be more effective in reducing corporate leverage.

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Bibliographic Info

Article provided by GDE (Giornale degli Economisti e Annali di Economia), Bocconi University in its journal Giornale degli Economisti e Annali di Economia.

Volume (Year): 64 (2005)
Issue (Month): 2-3 (November)
Pages: 271-294

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Handle: RePEc:gde:journl:gde_v64_n2-3_p271-294

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Related research

Keywords: corporate tax reform; fiscal microsimulation; corporate leverage; estimation of partial effects;

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References

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  1. Maria Elena Bontempi, 2002. "The dynamic specification of the modified pecking order theory: Its relevance to Italy," Empirical Economics, Springer, vol. 27(1), pages 1-22.
  2. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
  3. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  4. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
  5. Christopher F Baum & Mark E. Schaffer & Steven Stillman, 2003. "Instrumental variables and GMM: Estimation and testing," Stata Journal, StataCorp LP, vol. 3(1), pages 1-31, March.
  6. Bontempi Maria Elena & Giannini Silvia & Guerra Maria Cecilia & Tiraferri Angela, 2001. "Incentivi agli investimenti e tassazione dei profitti: l'impatto delle recenti riforme fiscali sul "cash flow" delle società di capitali," Politica economica, Società editrice il Mulino, issue 3, pages 249-284.
  7. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  8. Shyam-Sunder, Lakshmi & C. Myers, Stewart, 1999. "Testing static tradeoff against pecking order models of capital structure," Journal of Financial Economics, Elsevier, vol. 51(2), pages 219-244, February.
  9. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  10. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  11. Frank, Murray Z. & Goyal, Vidhan K., 2003. "Testing the pecking order theory of capital structure," Journal of Financial Economics, Elsevier, vol. 67(2), pages 217-248, February.
  12. Leamer, Edward E, 1985. "Sensitivity Analyses Would Help," American Economic Review, American Economic Association, vol. 75(3), pages 308-13, June.
  13. Granger, Clive W. J. & Jeon, Yongil, 2004. "Thick modeling," Economic Modelling, Elsevier, vol. 21(2), pages 323-343, March.
  14. Massimo Bordignon & Silvia Giannini & Paolo Panteghini, 2001. "Reforming Business Taxation: Lessons from Italy?," International Tax and Public Finance, Springer, vol. 8(2), pages 191-210, March.
  15. Hausman, Jerry A, 1978. "Specification Tests in Econometrics," Econometrica, Econometric Society, vol. 46(6), pages 1251-71, November.
  16. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  17. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
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Cited by:
  1. Giampaolo Arachi & Federico Biagi, 2005. "Taxation, Cost of Capital and Investment: Do Tax Asymmetries Matter?," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 64(2-3), pages 295-322, November.

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