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Companies’ Financial Decisions under the Distributed Profit Taxation Regime of Estonia

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  • Aaro Hazak

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    (School of Economics and Business Administration, Tallinn University of Technology)

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    Abstract

    This paper presents an empirical analysis of companies’ capital structure and dividend decisions under distributed profit taxation (DPT), the corporate taxation regime of Estonia since 2000. The survey is based on the financial information available from the Estonian Commercial Registry in respect of a sample of 51 thousand Estonian companies over a ten-year period. For the purposes of cross-country comparison, the Amadeus database information of 0.7 million companies from the European Union countries is used. The results give support to the hypothesis that the share of external financing in total capital of Estonian companies is lower in the conditions of DPT in comparison to that under the traditional gross profit taxation system. The DPT system has led companies to distribute lower portions of profit as dividends. The undistributed profits appear to be largely retained as surplus cash, instead of being reinvested into long term productive assets. DPT appears to have a positive impact on companies’ liquidity and sustainability, however the downside being the allocation of available funds into potentially inefficient investments. The results of the study may lead to discussions on introducing a similar system in other jurisdictions or on modifying the corporate taxation principles in Estonia.

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    File URL: http://deepthought.ttu.ee/majandus/tekstid/TUTWPE_07_155.pdf
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    Bibliographic Info

    Paper provided by Tallinn School of Economics and Business Administration, Tallinn University of Technology in its series Working Papers with number 155.

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    Length: 15
    Date of creation: 2007
    Date of revision:
    Publication status: Published in Working Papers in Economics.School of Economics and Business Administration,Tallinn University of Technology (TUTWPE), Pages 5-19
    Handle: RePEc:ttu:wpaper:155

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    Keywords: capital structure; dividend policy; corporate taxation;

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    1. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411.
    2. Frankfurter, George M. & Wood, Bob Jr., 2002. "Dividend policy theories and their empirical tests," International Review of Financial Analysis, Elsevier, vol. 11(2), pages 111-138.
    3. Michael Funke & Holger Strulik, 2004. "Taxation, growth and welfare: Dynamic effects of Estonia’s 2000 income tax act," Macroeconomics 0401009, EconWPA.
    4. Franklin Allen & Roni Michaely, 2002. "Payout Policy," Center for Financial Institutions Working Papers 01-21, Wharton School Center for Financial Institutions, University of Pennsylvania.
      • Allen, Franklin & Michaely, Roni, 2003. "Payout policy," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 7, pages 337-429 Elsevier.
    5. Lewellen, Wilbur G. & Mauer, David C., 1988. "Tax Options and Corporate Capital Structures," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(04), pages 387-400, December.
    6. Stewart C. Myers, 2001. "Capital Structure," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 81-102, Spring.
    7. Ronald C. Lease, & Kose John, & Avner Kalay, & Uri Loewenstein, & Oded H. Sarig,, 1999. "Dividend Policy:: Its Impact on Firm Value," OUP Catalogue, Oxford University Press, number 9780875844978, September.
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    1. Companies Financial Decisions under the Distributed Profit Taxation Regime of Estonia
      by admin in antti on 2012-06-17 13:42:19

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