Corporate Taxation and Firm-Specific Determinants of Capital Structure: Evidence from the UK and US Multinational Firms

Sarmad Ali,Adalberto Rangone,Muhammad Farooq

doi:10.3390/jrfm15020055

Abstract

This paper aims to examine whether effective tax rate and firm-specific factors (such as firm size, growth opportunities, tangibility, risk, profitability, non-debt tax shields and liquidity) impact the capital structure of multinational firms in the energy sector. We employ regression models consisting of OLS, fixed effect and random effect to test balanced panel dataset of multinational firms based in the UK and USA over the period 2011–2019. We show a positive and significant effect of tangibility, risk, profitability and non-debt tax shields on long-term and total debt measures of capital structure. In the case of short-term debt, however, we reveal that it is significantly negatively related to tangibility, non-debt tax shields and liquidity, and positively associated with firm risk. Moreover, we report that the effective tax rate and firm size are insignificantly negatively related to the leverage choices of multinational firms, and liquidity has a significant inverse relationship with long-term debt and total debt. This study reveals mixed support for the prevailing capital structure theories and evidence that multinational firms are unequivocally responsive to the capital structure. The results significantly contribute to evaluating multinational firms in the energy sector and show how managers can achieve an optimal level of capital structure.

Highlights

The selection of capital structure determinants has been subjected to controversy over the decades
This study employs ordinary least square (OLS), fixed- and random-effect multiple regression models to investigate the relationship between effective tax rate and leverage, as well as the effects of firm-specific factors on various measures of capital structure, a topic of ongoing debate in the field of corporate finance
Recent studies have concentrated on domestic non-financial firms across sectors in emerging economies, with little emphasis on multinational firms in a single industry, as they face more business opportunities and economic forces operating in an international environment than their domestic counterparts

Summary

Introduction

The selection of capital structure determinants has been subjected to controversy over the decades. A firm’s capital structure is influenced by changes in macroeconomic and firm-specific factors. A substantial body of literature has investigated the various theories of capital structure and the implications of macroeconomics and firm-level factors. A recent work by Heider and Ljungqvist (2015) and Barclay et al (2013) showed a significant influence of corporate taxation on the capital structure, since the trade-off theory identified this relationship as a cost and benefit analysis of borrowings. This theory postulates that a company should have high leverage in a country with a high corporate tax rate

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