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Debt and Taxes: Evidence from bank-financed unlisted firms

This paper analyzes the capital structure decision of non-listed bank-financed firms using a rich and unique new data set of Portuguese firms. These firms are rarely studied in capital structure contexts and differ from large listed firms in terms of agency and asymmetric information problems and funding sources. It is argued that the solution of agency and asymmetric information problems for large firms shows up on the balance sheet (as restrictions on debt) whereas for small firms these problems are solved by financial institutions and are therefore less apparent on the balance sheet. This makes it easier for small firms to exploit tax advantages of debt. The empirical analysis shows that debt tax shields and provisions for tax loss carry-forwards have an important impact on the capital structure of small firms. It is also found that the balance sheet variables used for large listed firms in different countries to model agency costs and asymmetric information do not work well for small non-listed firms. The only significant variables (besides tax variables) for small firms are bankruptcy (collateral) variables

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Paper provided by University of Aarhus, Aarhus School of Business, Department of Business Studies in its series Finance Research Group Working Papers with number F-2006-02.

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Length: 54 pages
Date of creation: 19 Apr 2006
Date of revision:
Handle: RePEc:hhb:aarbfi:2006-02
Contact details of provider: Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark
Fax: + 45 86 15 19 43
Web page: http://www.asb.dk/about/departments/bs.aspx

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