IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Taxes And Capital Structure: A Study Of European Companies

Listed author(s):
  • YUE CHENG
  • CHRISTOPHER J. GREEN

We analyse the impact of tax policy on firms' leverage ratios in a balanced panel of 129 medium-sized listed European companies from 1993 to 2005. A general model of company leverage is applied within which King's tax ratios are used to capture tax policy changes, controlling for non-tax influences. Leverage measures studied include total, long-term and short-term debt. A generalized method of moments estimator is used to control for endogeneity. The results suggest that tax policy has a significant but small impact on firms' debt ratios and that non-debt tax shields are a substitute for debt in company activities. Copyright © 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd and The University of Manchester.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-9957.2008.01082.x
File Function: link to full text
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by University of Manchester in its journal Manchester School.

Volume (Year): 76 (2008)
Issue (Month): S1 (09)
Pages: 85-115

as
in new window

Handle: RePEc:bla:manchs:v:76:y:2008:i:s1:p:85-115
Contact details of provider: Postal:
Manchester M13 9PL

Phone: (0)161 275 4868
Fax: (0)161 275 4812
Web page: http://www.blackwellpublishing.com/journal.asp?ref=1463-6786

More information through EDIRC

Order Information: Web: http://www.blackwellpublishing.com/subs.asp?ref=1463-6786

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. van der Wijst, Nico & Thurik, Roy, 1993. "Determinants of Small Firm Debt Ratios: An Analysis of Retail Panel Data," Small Business Economics, Springer, vol. 5(1), pages 55-65, March.
  3. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
  4. Brennan, Michael J & Schwartz, Edwardo S, 1978. "Corporate Income Taxes, Valuation, and the Problem of Optimal Capital Structure," The Journal of Business, University of Chicago Press, vol. 51(1), pages 103-114, January.
  5. J. A. Hausman & W. E. Taylor, 1980. "Panel Data and Unobservable Individual Effects," Working papers 255, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  7. Carl Chiarella & Toan Pham & Ah Boon Sim & Madeleine Tan, 1991. "Determinants of Corporate Capital Structure: Australian Evidence," Working Paper Series 3, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  8. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
  9. Plesko, George A., 2003. "An evaluation of alternative measures of corporate tax rates," Journal of Accounting and Economics, Elsevier, vol. 35(2), pages 201-226, June.
  10. Miller, Merton H & Rock, Kevin, 1985. " Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-1051, September.
  11. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
  12. Colin Mayer, 1986. "Corporation Tax, Finance and the Cost of Capital," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 93-112.
  13. Roger H. Gordon & Young Lee, 1999. "Do Taxes Affect Corporate Debt Policy? Evidence from US Corporate Tax Return Data," NBER Working Papers 7433, National Bureau of Economic Research, Inc.
  14. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring.
  15. Trezevant, Robert, 1992. " Debt Financing and Tax Status: Tests of the Substitution Effect and the Tax Exhaustion Hypothesis Using Firms' Responses to the Economic Recovery Tax Act of 1981," Journal of Finance, American Finance Association, vol. 47(4), pages 1557-1568, September.
  16. Graham C. Hall & Patrick J. Hutchinson & Nicos Michaelas, 2004. "Determinants of the Capital Structures of European SMEs," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(5-6), pages 711-728.
  17. T. S. Breusch & A. R. Pagan, 1980. "The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics," Review of Economic Studies, Oxford University Press, vol. 47(1), pages 239-253.
  18. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 38(2), pages 112-134.
  19. Downs, Thomas W, 1993. "Corporate Leverage and Nondebt Tax Shields: Evidence on Crowding-Out," The Financial Review, Eastern Finance Association, vol. 28(4), pages 549-583, November.
  20. Kim, E Han, 1978. "A Mean-Variance Theory of Optimal Capital Structure and Corporate Debt Capacity," Journal of Finance, American Finance Association, vol. 33(1), pages 45-63, March.
  21. Jeffrey MacKie-Mason, 1988. "Do Taxes Affect Corporate Financing Decisions?," NBER Working Papers 2632, National Bureau of Economic Research, Inc.
  22. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  23. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  24. Haufler, Andreas & Schjelderup, Guttorm, 2000. "Corporate tax systems and cross country profit shifting," Munich Reprints in Economics 20419, University of Munich, Department of Economics.
  25. Kraus, Alan & Litzenberger, Robert H, 1973. "A State-Preference Model of Optimal Financial Leverage," Journal of Finance, American Finance Association, vol. 28(4), pages 911-922, September.
  26. Graham, John R., 1999. "Do personal taxes affect corporate financing decisions?," Journal of Public Economics, Elsevier, vol. 73(2), pages 147-185, August.
  27. Chittenden, Francis & Hall, Graham & Hutchinson, Patrick, 1996. "Small Firm Growth, Access to Capital Markets and Financial Structure: Review of Issues and an Empirical Investigation," Small Business Economics, Springer, vol. 8(1), pages 59-67, February.
  28. Mikkelson, Wayne H. & Partch, M. Megan, 1986. "Valuation effects of security offerings and the issuance process," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 31-60.
  29. Michaelas, Nicos & Chittenden, Francis & Poutziouris, Panikkos, 1999. "Financial Policy and Capital Structure Choice in U.K. SMEs: Empirical Evidence from Company Panel Data," Small Business Economics, Springer, vol. 12(2), pages 113-130, March.
  30. Christian Weiner & Niels Ulbricht, 2005. "Worldscope meets Compustat: A Comparison of Financial Databases," SFB 649 Discussion Papers SFB649DP2005-064, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  31. Raghuram G. Rajan & Luigi Zingales, 1994. "What Do We Know About Capital Structure? Some Evidence from International Data," NBER Working Papers 4875, National Bureau of Economic Research, Inc.
  32. Mervyn A. King, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 21-35.
  33. Harris, Milton & Raviv, Artur, 1990. " Capital Structure and the Informational Role of Debt," Journal of Finance, American Finance Association, vol. 45(2), pages 321-349, June.
  34. Steven A. Sharpe & Hien H. Nguyen, 1994. "Capital market imperfections and the incentive to lease," Finance and Economics Discussion Series 94-5, Board of Governors of the Federal Reserve System (U.S.).
  35. Hirota, Shinichi, 1999. "Are Corporate Financing Decisions Different in Japan? An Empirical Study on Capital Structure," Journal of the Japanese and International Economies, Elsevier, vol. 13(3), pages 201-229, September.
  36. Alan Bevan & Jo Danbolt, 2002. "Capital structure and its determinants in the UK - a decompositional analysis," Applied Financial Economics, Taylor & Francis Journals, vol. 12(3), pages 159-170.
  37. Givoly, Dan, et al, 1992. "Taxes and Capital Structure: Evidence from Firms' Response to the Tax Reform Act of 1986," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 331-355.
  38. Keen, Michael & Shiantarelli, Fabio, 1991. "Corporation Tax Asymmetries and Optimal Financial Policy," Oxford Economic Papers, Oxford University Press, vol. 43(2), pages 280-291, April.
  39. Baltagi, Badi H. & Chang, Young-Jae & Li, Qi, 1992. "Monte Carlo results on several new and existing tests for the error component model," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 95-120.
  40. John R. Graham, 2000. "How Big Are the Tax Benefits of Debt?," Journal of Finance, American Finance Association, vol. 55(5), pages 1901-1941, October.
  41. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
  42. Graham, John R. & Tucker, Alan L., 2006. "Tax shelters and corporate debt policy," Journal of Financial Economics, Elsevier, vol. 81(3), pages 563-594, September.
  43. Sanjiva Prasad & Christopher J. Green & Victor Murinde, 2005. "Company Financial Structure: A Survey and Implications for Developing Economies," Chapters, in: Finance and Development, chapter 12 Edward Elgar Publishing.
  44. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
  45. Deen Kemsley & Doron Nissim, 2002. "Valuation of the Debt Tax Shield," Journal of Finance, American Finance Association, vol. 57(5), pages 2045-2073, October.
  46. John R. Graham & Michael L. Lemmon & James S. Schallheim, 1998. "Debt, Leases, Taxes, and the Endogeneity of Corporate Tax Status," Journal of Finance, American Finance Association, vol. 53(1), pages 131-162, 02.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:bla:manchs:v:76:y:2008:i:s1:p:85-115. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)

or (Christopher F. Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.