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Firm Financing in Chile After the 2014-2015 Tax Reform: Debt of Equity?

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  • Leonardo Hernández T.

    (The World Bank)

Abstract

This paper analyzes the effects of the 2014-2015 Chilean tax reform on firms' valuation and incentives to retain earnings and finance their operations with equity versus debt. By analyzing the effects of the reform on total taxes paid and cash flows received by investors, the paper concludes that in general the reform reduces the value of firms and lessens the incentives to retain earnings. Also, simulations show that the majority of firms would choose the accrual or "attributed" tax based system. However, if the latter is not permitted firms will choose debt over equity. The cash-based or semi-integrated system becomes the preferred option only when tax avoidance is possible.

Suggested Citation

  • Leonardo Hernández T., 2016. "Firm Financing in Chile After the 2014-2015 Tax Reform: Debt of Equity?," Revista de Analisis Economico – Economic Analysis Review, Universidad Alberto Hurtado/School of Economics and Business, vol. 31(2), pages 65-100, October.
    • Handle: RePEc:ila:anaeco:v:31:y:2016:i:2:p:65-100
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    More about this item

    Keywords

    Corporate tax; income tax; payout ratio; tax avoidance; firm financing;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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