Abstract
This study explores the role of taxes in explaining companies’ financing decisions. We test whether the corporate tax shields explanation of capital structure is applicable to firms listed on the Spanish stock exchange over the period 2007–2013. Taxes are found to be economically and statistically significant determinants of capital structure. Our results suggest that marginal tax rates affect the debt policies of Spanish listed companies, and the existence of non-debt tax shields constitutes an alternative to the use of debt as a tax shelter. Consistent with theoretical expectations, there is a stronger relation between debt and taxation in less levered firms. Finally, we empirically estimate the impact of the new thin-capitalization rule put forth by the Spanish government in 2012 on the financing behaviour of Spanish listed companies. Our empirical evidence supports the existence of a tax reform effect, where companies affected by interest deductibility limitations reduce their leverage more than companies that are not affected.
Highlights
A large body of research has examined the effects of corporate taxation
This paper provides empirical evidence on the statistical and economic impact of taxes on debt policy, using a data panel of Spanish listed companies covering the period 2007–2013
We follow the Graham (1996a) and Shevlin (1990) methodology for computing company-specific marginal tax rates, relying on the non-linearity of corporate tax schedules resulting from company losses and the ensuing tax provisions
Summary
A large body of research has examined the effects of corporate taxation. the results of empirical models vary significantly, the majority of this research does find that, to some degree, taxes influence a broad range of corporate financial decisions such as financing policy, investment policy or corporate reorganization and hedging. The magnitude of these effects and their overall impact on the economy are still under debate. The results of empirical models vary significantly, the majority of this research does find that, to some degree, taxes influence a broad range of corporate financial decisions such as financing policy, investment policy or corporate reorganization and hedging.. The results of empirical models vary significantly, the majority of this research does find that, to some degree, taxes influence a broad range of corporate financial decisions such as financing policy, investment policy or corporate reorganization and hedging.1 The magnitude of these effects and their overall impact on the economy are still under debate. Graham (2013) reviews a number of studies that suggest that taxes influence financing decisions; this effect is not always strong Likewise, he concludes that more research is needed for a better understanding of the influence of taxes on capital structure, related to time-series effects. Whether and to what extent taxation affects the choice of capital structure is still an unsettled topic, deserving further study
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
