A Taxing Question Does It Impact Capital Structure?

Abstract

This paper examines whether corporate tax changes or corporate tax regime changes influence the capital structure of firms. We exploit the corporate tax changes in Canada (1981-2015) and the United Kingdom (1981-2015), and tax system changes in Australia (1981-1998) and Taiwan (1981-2009) to assess these effects on capital structure. By employing fixed effect models, we find that corporate tax changes do not have significant impact on the capital structure of firms within the established imputation systems of Canada and the United Kingdom, and for the classical tax system in Taiwan. However, corporate tax has a negative impact on debt (ie debt goes down) when the system moves from a classical to imputation tax system in Taiwan. Overall, our findings suggest that although changes in corporate taxes have no impact on capital structure, tax regime change does have an effect on capital structure when a regime shifts from classical to imputation. This has important implications, for government policy, financial distress, and aggregate investment.