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The Effect of an Allowance for Corporate Equity on Capital Structure: Evidence From Austria

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  • Matthias Petutschnig
  • Silke Rünger

Abstract

We contribute to the empirical literature on the debt bias of corporate income taxation through a firm-level evaluation of the allowance for corporate equity (ACE) in Austria. We find that the Austrian ACE tax system increased corporate equity ratios by approximately 1.36 to 2.30 percentage points. Additionally, we find significant differences in the application of the ACE tax system depending on firm-specific dividend levels and firm-specific ownership structures. In particular, we find that the cost of constraining dividends appears to be higher than the tax benefit of the ACE tax system. Additionally, we find that firms with dispersed ownership refrain from applying the ACE tax system, which might be due to the fact that firms with less dispersed ownership can react more quickly to tax law changes.

Suggested Citation

  • Matthias Petutschnig & Silke Rünger, 2022. "The Effect of an Allowance for Corporate Equity on Capital Structure: Evidence From Austria," Public Finance Review, , vol. 50(5), pages 597-642, September.
    • Handle: RePEc:sae:pubfin:v:50:y:2022:i:5:p:597-642
    DOI: 10.1177/10911421221125150
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    References listed on IDEAS

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    1. Wald, John K, 1999. "How Firm Characteristics Affect Capital Structure: An International Comparison," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 22(2), pages 161-187, Summer.
    2. Martin Jacob & Roni Michaely, 2017. "Taxation and Dividend Policy: The Muting Effect of Agency Issues and Shareholder Conflicts," The Review of Financial Studies, Society for Financial Studies, vol. 30(9), pages 3176-3222.
    3. Asquith, Paul & Mullins, David W, Jr, 1983. "The Impact of Initiating Dividend Payments on Shareholders' Wealth," The Journal of Business, University of Chicago Press, vol. 56(1), pages 77-96, January.
    4. Nicola Branzoli & Antonella Caiumi, 2020. "How effective is an incremental ACE in addressing the debt bias? Evidence from corporate tax returns," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(6), pages 1485-1519, December.
    5. John K. Wald, 1999. "How Firm Characteristics Affect Capital Structure: An International Comparison," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 22(2), pages 161-187, June.
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