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The impact of tax policy on corporate debt in a developing economy: a study of unquoted Indian companies

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  • Christopher Green
  • Victor Murinde

Abstract

Taxation has potentially important implications for corporate behaviour. However, there have been few studies of the impact of taxation on companies in developing countries, and fewer still concerned with unquoted companies. In this paper, we study the impact of tax policy on the financial decisions of a sample of unquoted companies in India during the period 1989-99 when tax rates were generally reduced as part of a wider programme of financial liberalization. We examine the impact of the tax regime on company financing decisions, within the context of a model of company leverage, controlling for non-tax influences suggested by the theory of corporate finance. The analysis is carried out using a balanced panel consisting of the published accounts of 97 Indian unquoted companies, which reported continuously during 1989-99. The model is estimated using Generalized Methods of Moments (GMM). Estimates of the impact of the 1990s tax reforms are derived, and implications for policy are drawn.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

Volume (Year): 14 (2008)
Issue (Month): 7 ()
Pages: 583-607

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Handle: RePEc:taf:eurjfi:v:14:y:2008:i:7:p:583-607

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Keywords: India; corporate finance; taxation;

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Cited by:
  1. 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.

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