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Agency costs, taxes and debt: The UK evidence

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  • M. Ameziane Lasfer

Abstract

This paper provides an empirical examination of the impact of the corporation tax and agency costs on firms' capital structure decisions. Our evidence suggests that the agency costs are the main determinants of corporate borrowing. Consistent with the agency theory, we find that firms that have fewer growth options have more debt in their capital structure. Moreover, our results show that debt mitigates the free cash flow problem and that firms that are more likely to be diversified and less prone to bankruptcy are highly geared. the negative effect of insider shareholding on leverage disappears, however; when all the agency mechanisms are accounted for. In addition, we find that, in the long run, companies that are tax exhausted exhibit significantly lower debt ratios than tax‐paying firms. However, in the short run, firms' capital structure decisions are not affected by taxation.

Suggested Citation

  • M. Ameziane Lasfer, 1995. "Agency costs, taxes and debt: The UK evidence," European Financial Management, European Financial Management Association, vol. 1(3), pages 265-285, November.
  • Handle: RePEc:bla:eufman:v:1:y:1995:i:3:p:265-285
    DOI: 10.1111/j.1468-036X.1995.tb00020.x
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    File URL: https://doi.org/10.1111/j.1468-036X.1995.tb00020.x
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