Impact of Tax Benefits and Earnings Management on Capital structures Across V4 Countries

Abstract

The issue of capital structure is among the most commonly discussed fields within Corporate Finance Theory.By optimizing the capital structure, it is possible to achieve an increase in the company value and increase the company flexibility and competitiveness.Economists have, for more than half a century, seen tax benefits (tax shields) as a capital structure determinant.Nonetheless, leverage is also influenced by earnings management, which can significantly reduce information asymmetry, between stakeholders when used correctly.This paper examines the influence of the tax shield and earnings management on a corporate capital structure, in V4 countries.In order to determine the influence of the tax shield and earnings management, panel data model was used.Net sample consisted of 10627 companies from the V4 countries from 2014-2017.The results of the model indicate that corporate behavior in the area of capital structure follows Pecking order; short-term trade credit is the most commonly used liability.The interest tax shield is of little importance for deciding between debt and equity, while the non-debt tax shield is negatively correlated with debt.Furthermore, an inverse correlation between debt and earnings management, as measured by the modified Jones model, indicates that debt monitoring, reduces agent costs and reduces the application of earnings management techniques.

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