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Role of personal taxes in capital structure decisions: Evidence from India

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  • Pankaj Sinha

    (Faculty of Management Studies, University of Delhi, India Author-Name: Vishakha Bansal
    Faculty of Management Studies, University of Delhi, India)

Abstract

The study investigates the role of personal taxes in corporate financing decisions and its impact on the corporate tax advantage of debt in domestic manufacturing companies in India. Incremental financing decisions have been analyzed through pooled cross section of time series data on 288 firms from 1989-2011. The effect of personal taxes is captured through two different methods; in one specification marginal tax rates have been adjusted for personal tax penalty and in the other, effect of personal taxes has been captured separately. Results reveal a strong effect of relative personal tax disadvantage of debt on leverage decisions of Indian firms. After including personal taxes, marginal taxes become insignificant. The study also documents that the specification considering the individual effects of corporate and personal taxes is found to be better than the one which adjusts corporate taxes for personal tax penalty.

Suggested Citation

  • Pankaj Sinha, 2013. "Role of personal taxes in capital structure decisions: Evidence from India," Business and Economic Horizons (BEH), Prague Development Center, vol. 9(3), pages 41-55, October.
    • Handle: RePEc:pdc:jrnbeh:v:9:y:2013:i:3:p:41-55
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    References listed on IDEAS

    as
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    3. Guha-Khasnobis, Basudeb & N. Bhaduri, Saumitra, 2002. "Determinants of Capital Structure in India (1990-1998): A Dynamic Panel Data Approach," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 17, pages 761-776.
    4. Julian Alworth & Giampaolo Arachi, 2001. "The Effect of Taxes on Corporate Financing Decisions: Evidence from a Panel of Italian Firms," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(4), pages 353-376, August.
    5. Stewart C. Myers, 2001. "Capital Structure," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 81-102, Spring.
    6. Saumitra Bhaduri, 2002. "Determinants of capital structure choice: a study of the Indian corporate sector," Applied Financial Economics, Taylor & Francis Journals, vol. 12(9), pages 655-665.
    7. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Personal tax rate; Miller tax term; marginal tax Rate; debt; leverage; capital structure; tax; incremental debt; debt to equity ratio; corporate finance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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