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The Determinants of Colombian Firm´s Debt-Asset Ratio (1997-2003)

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  • Enrique PINZON GARCIA

    ()

  • Oscar M. VALENCIA ARANA

Abstract

This article conveys a new approach to modeling corporate debt and financing decisions and how they are influenced by taxes using data from Colombia between 1997 and 2003. Primarily, it does not assume that debt decisions are separate from investment decisions as is common in the literature about the subject. In this paper investment is modeled as an endogenous variable using two stage least squares (2SLS). Moreover, it follows Gropp (1997) in estimating expected effective tax rates via rational expectations and allows for an assessment of the different tax proxies used in the literature. Empirical estimations suggest that investment is endogenous and that during the time period analyzed had no relationship with firm debt-asset relations. Moreover they portray that volatility considerations are fundamental determinants of the debt asset ratio. Particularly, the variance of the estimated income tax has affected the firms during the reference period. These results were calculated for firms facing financial constraints and they continue to be robust. The previous facts reveal that Colombian firms closely resemble the trade-off theory of leverage. Finally, it is clear that the economic crisis has affected firms severely during the period analyzed but that recovery was meager, even after the crisis, due to the fluctuating fiscal policy.

Suggested Citation

  • Enrique PINZON GARCIA & Oscar M. VALENCIA ARANA, 2006. "The Determinants of Colombian Firm´s Debt-Asset Ratio (1997-2003)," ARCHIVOS DE ECONOMÍA 003582, DEPARTAMENTO NACIONAL DE PLANEACIÓN.
  • Handle: RePEc:col:000118:003582
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    References listed on IDEAS

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    1. Jairo Núñez & Roberto Steiner & Ximena Cadena & Renata Pardo, 2002. "¿Cuáles Colegios Ofrecen Mejor Educación En Colombia?," DOCUMENTOS CEDE 003796, UNIVERSIDAD DE LOS ANDES-CEDE.
    2. Leonardo Rhenals Rojas, 2005. "Costo de Uso del Capital en Colombia:1997 -2003," Macroeconomics 0502003, University Library of Munich, Germany.
    3. Javier A. Birchenall, 2007. "Income distribution and macroeconomics in Colombia," Journal of Income Distribution, Ad libros publications inc., vol. 16(2), pages 6-24, June.
    4. Castro Carlos Alberto, 2001. "Eficiencia-X en el sector bancario colombiano," REVISTA DESARROLLO Y SOCIEDAD, UNIVERSIDAD DE LOS ANDES-CEDE, September.
    5. Diego F. Angel-Urdinola & Quentin Wodon, 2006. "The Gender Wage Gap and Poverty in Colombia," LABOUR, CEIS, vol. 20(4), pages 721-739, December.
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    7. Ortega, Juan Ricardo & Piraquive, Gabriel Armando & Hernandez, Gustavo Adolfo & Soto, Carolina & Prada, Sergio & Ramirez, Juan Mauricio, 2000. "Incidencia fiscal de los incentivos tributarios
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    More about this item

    Keywords

    Debt Asset Ratios; Leverage; Tax Incidence; Two SLS;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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