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Capital structure, corporate taxation and firm age

  • Pfaffermayr, Michael

    ()

    (Department of Economics and Statistics, University of Innsbruck)

  • Stoeckl, Matthias

    ()

    (University of Salzburg)

  • Winner, Hannes

    ()

    (University of Salzburg)

This paper analyzes the relationship between corporate taxation, firm age and debt. We adapt a standard model of capital structure choice under corporate taxation, focusing on the financing and investment decisions a firm is typically faced with. Our model suggests that the debt ratio is positively associated with the corporate tax rate, and negatively with firm age. Further, we predict that the tax-induced advantage of debt is more important for older than for younger firms. To test these hypotheses empirically, we use a cross-section of 405,000 firms from 35 European countries and 126 NACE 3-digit industries. In line with previous research, we and that a firm's debt ratio increases with the corporate tax rate. Further, we observe that older firms exhibit smaller debt ratios than their younger counterparts. Finally, consistent with our theoretical model, we and a positive interaction between corporate taxation and firm age, indicating that the impact of corporate taxation on debt is increasing over a firm's life-time.

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Paper provided by University of Salzburg in its series Working Papers in Economics and Finance with number 2009-4.

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Length: 31 pages
Date of creation: 11 Nov 2009
Date of revision:
Handle: RePEc:ris:sbgwpe:2009_004
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