IDEAS home Printed from https://ideas.repec.org/a/kap/itaxpf/v8y2001i4p353-376.html
   My bibliography  Save this article

The Effect of Taxes on Corporate Financing Decisions: Evidence from a Panel of Italian Firms

Author

Listed:
  • Julian Alworth
  • Giampaolo Arachi

Abstract

This paper provides additional evidence on the relationship between corporate taxes and debt using panel data on Italian companies. The panel covers 1054 companies for the years 1982–1994. The paper follows the Graham-Shevlin methodology for calculating company specific marginal tax rates (MTR) relying on the non-linearity of corporate tax schedules resulting from company losses and the ensuing tax provisions (carry-forward and backward rules). In the period covered by the panel there were in Italy two taxes on corporate income (IRPEG and ILOR), with different loss carry-forward rules, whose statutory tax rates and tax bases changed several times. For these reasons the simulated MTRs display both cross-sectional and time-series variation. The paper tests whether taxes encourage the use of debt by analysing incremental financing decisions. In order to cope with the endogeneity of the MTR the paper considers two different specifications. The first uses the lagged value of the simulated MTR. The second employs the estimate of before-financing MTR proposed by Graham et al. (1998). Significant cross-sectional tax effects are identified under both specifications whereas time-series variation cannot be identified if due account is taken of firm-fixed tax effects. The paper also investigates whether personal taxes affect corporate financing decisions. The MTR may either overstate or understate the fiscal benefit of debt financing according to whether, at the personal level, interest income is taxed at a rate that is higher or lower than the tax rate on returns from common stocks. Differences in the dividend-payout ratio across companies and several reforms in interest, dividend and capital gains taxation provide sufficient cross-section and time-series variations to identify the effect of personal taxes on debt usage. Copyright Kluwer Academic Publishers 2001

Suggested Citation

  • Julian Alworth & Giampaolo Arachi, 2001. "The Effect of Taxes on Corporate Financing Decisions: Evidence from a Panel of Italian Firms," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(4), pages 353-376, August.
    • Handle: RePEc:kap:itaxpf:v:8:y:2001:i:4:p:353-376
    DOI: 10.1023/A:1011258605504
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1023/A:1011258605504
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1023/A:1011258605504?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gordon, Roger H. & Lee, Young, 2001. "Do taxes affect corporate debt policy? Evidence from U.S. corporate tax return data," Journal of Public Economics, Elsevier, vol. 82(2), pages 195-224, November.
    2. Patrick Bolton & Xavier Freixas, 2000. "Equity, Bonds, and Bank Debt: Capital Structure and Financial Market Equilibrium under Asymmetric Information," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 324-351, April.
    3. 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.
    4. MacKie-Mason, Jeffrey K, 1990. "Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-1493, December.
    5. 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.
    6. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    7. Kale, Jayant R & Noe, Thomas H & Ramirez, Gabriel G, 1991. "The Effect of Business Risk on Corporate Capital Structure: Theory and Evidence," Journal of Finance, American Finance Association, vol. 46(5), pages 1693-1715, December.
    8. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
    9. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
    10. Graham, John R., 1999. "Do personal taxes affect corporate financing decisions?," Journal of Public Economics, Elsevier, vol. 73(2), pages 147-185, August.
    11. Pauline M. Shum, 1996. "Taxes and Corporate Debt Policy in Canada: An Empirical Investigation," Canadian Journal of Economics, Canadian Economics Association, vol. 29(3), pages 556-572, August.
    12. Scholes, Myron S & Wilson, G Peter & Wolfson, Mark A, 1990. "Tax Planning, Regulatory Capital Planning, and Financial Reporting Strategy for Commercial Banks," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 625-650.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bartholdy, Jan & Mateus, Cesário, 2006. "Debt and Taxes: Evidence from bank-financed unlisted firms," Finance Research Group Working Papers F-2006-02, University of Aarhus, Aarhus School of Business, Department of Business Studies.
    2. Feld, Lars P. & Heckemeyer, Jost H. & Overesch, Michael, 2013. "Capital structure choice and company taxation: A meta-study," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2850-2866.
    3. Michele Bernasconi & Anna Marenzi & Laura Pagani, 2005. "Corporate Financing Decisions and Non-Debt Tax Shields: Evidence from Italian Experiences in the 1990s," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(6), pages 741-773, November.
    4. Michael Pfaffermayr & Matthias Stöckl & Hannes Winner, 2013. "Capital Structure, Corporate Taxation and Firm Age," Fiscal Studies, Institute for Fiscal Studies, vol. 34(1), pages 109-135, March.
    5. Glenn Boyle & Kelly Eckhold, 1997. "Capital structure choice and financial market liberalization: evidence from New Zealand," Applied Financial Economics, Taylor & Francis Journals, vol. 7(4), pages 427-437.
    6. Mai, Nhat Chi, 2012. "Market timing, taxes and capital structure: evidence from Vietnam," OSF Preprints t3mvs, Center for Open Science.
    7. Alfons J. Weichenrieder & Tina Klautke & Alfons Weichenrieder, 2008. "Taxes and the Efficiency Costs of Capital Distortions," CESifo Working Paper Series 2431, CESifo.
    8. Stöckl Matthias & Winner Hannes, 2013. "Körperschaftsbesteuerung und Unternehmensverschuldung: Evidenz aus einem Europäischen Firmenpanel / Capital Structure and Corporate Taxation: Empirical Evidence from European Panel Data," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 233(2), pages 188-205, April.
    9. Bartholdy, Jan & Mateus, Cesário, 2011. "Debt and taxes for private firms," International Review of Financial Analysis, Elsevier, vol. 20(3), pages 177-189, June.
    10. Yue Cheng & Christopher J. Green, 2008. "Taxes And Capital Structure: A Study Of European Companies," Manchester School, University of Manchester, vol. 76(s1), pages 85-115, September.
    11. Hong-Yi Chen & Cheng Few Lee & Tzu Tai, 2020. "The Joint Determinants of Capital Structure and Stock Rate of Return: A LISREL Model Approach," World Scientific Book Chapters, in: Cheng Few Lee & John C Lee (ed.), HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING, chapter 35, pages 1345-1397, World Scientific Publishing Co. Pte. Ltd..
    12. Michael S. H. Shih, 1996. "Les déterminants du niveau d'endettement de l'entreprise: une analyse de séries chronologiques constituées à partir des données contenues dans les déclarations de revenus produites aux États†U," Contemporary Accounting Research, John Wiley & Sons, vol. 13(2), pages 505-526, September.
    13. José A. Clemente-Almendros & Francisco Sogorb-Mira, 2016. "The effect of taxes on the debt policy of spanish listed companies," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 7(3), pages 359-391, August.
    14. Chaido Dritsak, 2015. "Box Jenkins Modeling of Greek Stock Prices Data," International Journal of Economics and Financial Issues, Econjournals, vol. 5(3), pages 740-747.
    15. Michael Overesch & Dennis Voeller, 2010. "The Impact of Personal and Corporate Taxation on Capital Structure Choices," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 66(3), pages 263-294, September.
    16. Jeffrey K. MacKie-Mason, 1990. "Do Firms Care Who Provides Their Financing?," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 63-104, National Bureau of Economic Research, Inc.
    17. Graham, John R., 1996. "Debt and the marginal tax rate," Journal of Financial Economics, Elsevier, vol. 41(1), pages 41-73, May.
    18. Auerbach, Alan J., 2002. "Taxation and corporate financial policy," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 19, pages 1251-1292, Elsevier.
    19. Songul KAKILLI ACARAVCI, 2015. "The Determinants of Capital Structure: Evidence from the Turkish Manufacturing Sector," International Journal of Economics and Financial Issues, Econjournals, vol. 5(1), pages 158-171.
    20. Antonio De Socio & Valentina Nigro, 2012. "Does corporate taxation affect cross-country firm leverage?," Temi di discussione (Economic working papers) 889, Bank of Italy, Economic Research and International Relations Area.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:itaxpf:v:8:y:2001:i:4:p:353-376. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.