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The Impact of Personal and Corporate Taxation on Capital Structure Choices

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  • Michael Overesch
  • Dennis Voeller
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    Abstract

    This paper empirically analyzes whether both personal and corporate taxation have an influence on companies´ capital structure decisions. We investigate the effect of the difference in taxation of debt and equity financing on capital structure. Our empirical results, based on a panel of European firm-level data, suggest that a higher tax benefit of debt has the expected significant positive effect on a company´s financial leverage. We find evidence that the capital structures of smaller companies respond more heavily to changes in the tax benefit of debt. Additional analysis confirms that, in particular, variation in capital income tax rates at the shareholder level implicates significant capital structure adjustments. Moreover, we find substitutive relationships between non-debt tax shields and the effect of the corporate tax rate on capital structure.

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    Bibliographic Info

    Article provided by Mohr Siebeck, Tübingen in its journal FinanzArchiv.

    Volume (Year): 66 (2010)
    Issue (Month): 3 (September)
    Pages: 263-294

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    Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201009)66:3_263:tiopac_2.0.tx_2-x

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    Web page: http://www.mohr.de/fa

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    Postal: Mohr Siebeck GmbH & Co. KG, P.O.Box 2040, 72010 Tübingen, Germany
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    Related research

    Keywords: capital structure; corporate income tax; personal income tax; firm-level data;

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    Cited by:
    1. Matthias Stöckl & Hannes Winner, 2013. "Koerperschaftsbesteuerung und Unternehmensverschuldung: Evidenz aus einem Europaeischen Firmenpanel," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 233(2), pages 188-205, March.
    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. Matthias Stöckl & Hannes Winner, . "Capital Structure and Corporate Taxation. Empirical Evidence from European Panel Data," WIFO Working Papers 422, WIFO.

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