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Corporate tax exhaustion and financial policy : evidence on Finnish data

  • Kimmo Virolainen

    (Helsinki School of Economics)

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    This paper examines in detail the empirical implications concerning taxation and optimal borrowing of the so called tax shelter-bankruptcy cost model. It is shown that in an institutional environment which allows the use of relatively large non-debt related tax shields, it is possible that firms exhaust the tax benefit of debt financing already at riskless debt levels. This, in turn, implies that the relevance of risk factors of debt in explaining optimal financial structure may be related to the firm's expected tax status. Empirical findings on a sample of Finnish manufacturing firms support the hypothesis that there are differences in the borrowing behaviour between tax exhausted and non-tax exhausted firms.

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    File URL: http://taloustieteellinenyhdistys.fi/images/stories/fep/f1991_2d.pdf
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    Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

    Volume (Year): 4 (1991)
    Issue (Month): 2 (Autumn)
    Pages: 130-141

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    Handle: RePEc:fep:journl:v:4:y:1991:i:2:p:130-141
    Contact details of provider: Web page: http://www.taloustieteellinenyhdistys.fi

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    1. Bradley, Michael & Jarrell, Gregg A & Kim, E Han, 1984. " On the Existence of an Optimal Capital Structure: Theory and Evidence," Journal of Finance, American Finance Association, vol. 39(3), pages 857-78, July.
    2. Scott, James H, Jr, 1977. "Bankruptcy, Secured Debt, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 32(1), pages 1-19, March.
    3. Castanias, Richard, 1983. " Bankruptcy Risk and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 38(5), pages 1617-35, December.
    4. Kraus, Alan & Litzenberger, Robert H, 1973. "A State-Preference Model of Optimal Financial Leverage," Journal of Finance, American Finance Association, vol. 28(4), pages 911-22, September.
    5. 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.
    6. 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.
    7. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    8. MacKie-Mason, Jeffrey K, 1990. " Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-93, December.
    9. 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.
    10. 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.
    11. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
    12. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    13. Mayer, Colin, 1986. "Corporation Tax, Finance and the Cost of Capital," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 93-112, January.
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