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TAXES AND CAPITAL STRUCTURE: A STUDY OF EUROPEAN COMPANIES
Author(s) -
CHENG YUE,
GREEN CHRISTOPHER J.
Publication year - 2008
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/j.1467-9957.2008.01082.x
Subject(s) - capital structure , leverage (statistics) , monetary economics , economics , debt ratio , endogeneity , debt , tax shield , tax policy , corporate tax , business , tax reform , finance , value added tax , econometrics , macroeconomics , public economics , tax avoidance , state income tax , machine learning , computer science , gross income
We analyse the impact of tax policy on firms' leverage ratios in a balanced panel of 129 medium‐sized listed European companies from 1993 to 2005. A general model of company leverage is applied within which King's tax ratios are used to capture tax policy changes, controlling for non‐tax influences. Leverage measures studied include total, long‐term and short‐term debt. A generalized method of moments estimator is used to control for endogeneity. The results suggest that tax policy has a significant but small impact on firms' debt ratios and that non‐debt tax shields are a substitute for debt in company activities.