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Taxation and capital structure : evidence from a transition economy

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  • Klapper, Leora
  • Tzioumis, Konstantinos

Abstract

The authors examine the effects of taxation on financing policy using the corporate tax reform in 2001 in Croatia as a natural experiment. Since the extant literature on tax effects on capital structure studies listed firms in developed countries, it is worth investigating whether the same results apply to privately-held, small and medium size firms in transition economies. The findings provide significant evidence that lower taxes have affected the capital structure of Croatian firms, resulting in increased equity levels and decreased long-term debt levels. The authors also find that smaller and more profitable firms weremore likely to reduce their debt levels. These findings are consistent with the trade-off theory of capital structure, which suggests that lower taxes decrease the incentive to hold debt due to decreasing interest tax deductibility.

Suggested Citation

  • Klapper, Leora & Tzioumis, Konstantinos, 2008. "Taxation and capital structure : evidence from a transition economy," Policy Research Working Paper Series 4753, The World Bank.
  • Handle: RePEc:wbk:wbrwps:4753
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    13. Lyrintzis, Christos, 2011. "Greek politics in the era of economic crisis: reassessing causes and effects," LSE Research Online Documents on Economics 33826, London School of Economics and Political Science, LSE Library.
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    More about this item

    Keywords

    Debt Markets; Taxation&Subsidies; Emerging Markets; Banks&Banking Reform; Access to Finance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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