TAXES AND CAPITAL STRUCTURE: A STUDY OF EUROPEAN COMPANIES

Yue Cheng · Christopher J. Green

42 citations0/0 files storedManchester School

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Corporate Finance and Governance Financial Analysis and Corporate Governance Corporate Taxation and Avoidance

Abstract

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.

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References

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