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The role of taxes in capital structure: evidence from taxed and non-taxed Arab economies

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  • Barakat, Mounther-Hussein
  • Rao, Ramesh-P

Abstract

The Arab economies present a unique opportunity to test the tax model of capital structure. These economies may be dichotomized into taxable and non-taxable states. The results support a number of implications of the tax-based theories of capital structure. We document relatively higher leverage in economies that impose a corporate income tax. We also document that leverage is significantly positive in the proxy for corporate marginal tax rate. In addition, we find that non-debt tax shield is a positive and significant determinant of capital structure in non-taxed economies, but is insignificant in taxed economies. Additionally, we find that leverage is systematically related to size, collateral, and profitability. The overall results are suggestive of the portability of capital structure theory(ies) across diverse economies.

Suggested Citation

  • Barakat, Mounther-Hussein & Rao, Ramesh-P, 2003. "The role of taxes in capital structure: evidence from taxed and non-taxed Arab economies," MPRA Paper 25472, University Library of Munich, Germany, revised Aug 2006.
  • Handle: RePEc:pra:mprapa:25472
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    4. Muhammad Asif Joyo & Nawaz Ahmad & Ghulam Mustafa Shaikh, 2017. "The Role Of Business Risk And Non Debt Tax Shields On Capital Structure: A Study Based On Cement Sector In Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 13(2), pages 13-14.
    5. Muhammad Asif Joyo & Nawaz Ahmad & Ghulam Mustafa Shaikh, 2017. "The Role Of Business Risk And Non Debt Tax Shields On Capital Structure: A Study Based On Cement Sector In Pakistan," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 13(2), pages 36-49.
    6. Strike Mbulawa & Nathan F. Okurut & Mogale Ntsosa & Narain Sinha, 2020. "Optimal Capital Structure and Speed of Adjustment under Hyperinflation and Dollarization," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 12(2), pages 158-177, May.
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    More about this item

    Keywords

    Capital Struacutre; Arab Economies; Taxes; Debt Tax Shiled;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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