The Effect of Taxes on Corporate Financing Decisions: Evidence from a Panel of Italian Firms
This paper provides additional evidence on the relationship between corporate taxes and debt using panel data on Italian companies. The panel covers 1054 companies for the years 1982–1994. The paper follows the Graham-Shevlin methodology for calculating company specific marginal tax rates (MTR) relying on the non-linearity of corporate tax schedules resulting from company losses and the ensuing tax provisions (carry-forward and backward rules). In the period covered by the panel there were in Italy two taxes on corporate income (IRPEG and ILOR), with different loss carry-forward rules, whose statutory tax rates and tax bases changed several times. For these reasons the simulated MTRs display both cross-sectional and time-series variation. The paper tests whether taxes encourage the use of debt by analysing incremental financing decisions. In order to cope with the endogeneity of the MTR the paper considers two different specifications. The first uses the lagged value of the simulated MTR. The second employs the estimate of before-financing MTR proposed by Graham et al. (1998). Significant cross-sectional tax effects are identified under both specifications whereas time-series variation cannot be identified if due account is taken of firm-fixed tax effects. The paper also investigates whether personal taxes affect corporate financing decisions. The MTR may either overstate or understate the fiscal benefit of debt financing according to whether, at the personal level, interest income is taxed at a rate that is higher or lower than the tax rate on returns from common stocks. Differences in the dividend-payout ratio across companies and several reforms in interest, dividend and capital gains taxation provide sufficient cross-section and time-series variations to identify the effect of personal taxes on debt usage. Copyright Kluwer Academic Publishers 2001
Volume (Year): 8 (2001)
Issue (Month): 4 (August)
|Contact details of provider:|| Web page: http://www.springer.com|
Postal:P.O. Box 86 04 46, 81631 Munich, Germany
Phone: +49 (0)89-9224-1281
Fax: +49 (0)89-907795-2281
Web page: http://www.iipf.org/index.htm
More information through EDIRC
|Order Information:||Web: http://www.springer.com/economics/public+finance/journal/10797/PS2|
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.:
- 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.
- Graham, John R., 1999. "Do personal taxes affect corporate financing decisions?," Journal of Public Economics, Elsevier, vol. 73(2), pages 147-185, August.
- Jeffrey MacKie-Mason, 1988.
"Do Taxes Affect Corporate Financing Decisions?,"
NBER Working Papers
2632, National Bureau of Economic Research, Inc.
- 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.
- Pauline M. Shum, 1996. "Taxes and Corporate Debt Policy in Canada: An Empirical Investigation," Canadian Journal of Economics, Canadian Economics Association, vol. 29(3), pages 556-72, August.
- Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
- 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.
- Gordon, Roger H. & Lee, Young, 2001. "Do taxes affect corporate debt policy? Evidence from U.S. corporate tax return data," Journal of Public Economics, Elsevier, vol. 82(2), pages 195-224, November.
- Kale, Jayant R & Noe, Thomas H & Ramirez, Gabriel G, 1991. " The Effect of Business Risk on Corporate Capital Structure: Theory and Evidence," Journal of Finance, American Finance Association, vol. 46(5), pages 1693-715, December.
- 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.
- Patrick Bolton & Xavier Freixas, 2000. "Equity, Bonds, and Bank Debt: Capital Structure and Financial Market Equilibrium under Asymmetric Information," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 324-351, April.
- 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.
When requesting a correction, please mention this item's handle: RePEc:kap:itaxpf:v:8:y:2001:i:4:p:353-376. 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: (Sonal Shukla)or (Rebekah McClure)
If references are entirely missing, you can add them using this form.