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Tax incentives and capital structure choice: Evidence from Germany

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Listed author(s):
  • Hartmann-Wendels, Thomas
  • Stein, Ingrid
  • Stöter, Alwin

Abstract

This paper provides new evidence that taxes affect capital structure choice, using a unique and comprehensive panel data set which covers 86,173 German non-financial firms over the years 1973-2008. Following the Graham methodology to simulate marginal tax rates, we find a statistically and economically significant positive relationship between the marginal tax benefit of debt (net and gross of investor taxes) and the debt ratio. A 10% increase in the net (gross) marginal tax benefit of debt causes a 1.5% (1.6%) increase in the debt ratio, ceteris paribus. The results are robust to various specifications like using changes in debt or debt to capital ratios. A significantly positive effect of taxes on the debt ratio can also be identified in a partial adjustment model.

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File URL: https://www.econstor.eu/bitstream/10419/64815/1/726774529.pdf
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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Papers with number 18/2012.

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Date of creation: 2012
Handle: RePEc:zbw:bubdps:182012
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Keywords: debt; capital structure; marginal tax rate; corporate taxes; personal taxes;

Find related papers by JEL classification:

  • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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  1. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, 09.
  2. Amihud, Yakov & Murgia, Maurizio, 1997. " Dividends, Taxes, and Signaling: Evidence from Germany," Journal of Finance, American Finance Association, vol. 52(1), pages 397-408, March.
  3. Antoniou, Antonios & Guney, Yilmaz & Paudyal, Krishna, 2008. "The Determinants of Capital Structure: Capital Market-Oriented versus Bank-Oriented Institutions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(01), pages 59-92, March.
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Cited by:

  1. José A. Clemente-Almendros & Francisco Sogorb-Mira, 2016. "The effect of taxes on the debt policy of spanish listed companies," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 7(3), pages 359-391, August.
  2. Thomas Hemmelgarn & Daniel Teichmann, 2014. "Tax reforms and the capital structure of banks," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 21(4), pages 645-693, August.

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