The Impact of Personal and Corporate Taxation on Capital Structure Choices

38 Pages Posted: 7 Apr 2008 Last revised: 14 Aug 2008

See all articles by Michael Overesch

Michael Overesch

Universität zu Köln

Dennis Voeller

University of Mannheim - Accounting and Taxation

Date Written: 2008

Abstract

This paper empirically analyses whether both personal and corporate taxation have an impact on companies' capital structure decisions. We investigate the effect of the difference in taxation of debt and equity financing on capital structures. Our empirical results, based on a comprehensive panel of European firm-level data, suggest that a higher tax benefit of debt has the expected significant positive impact on a company's financial leverage. Particularly, we find evidence that the capital structures of smaller companies respond more heavily to changes in the tax benefit of debt. Additional analysis confirms that not only corporate taxes are relevant for corporate financial planning, but variation in capital income tax rates at the shareholder level implicates significant capital structure adjustments as well. Moreover, we find substitutive relationships between non-debt tax shields and the effect of the corporate tax rate on capital structures.

Keywords: Capital Structure, Corporate Income Tax, Personal Income Tax, Firm-Level Data

JEL Classification: G30, G32, H24, H25

Suggested Citation

Overesch, Michael and Voeller, Dennis, The Impact of Personal and Corporate Taxation on Capital Structure Choices (2008). ZEW - Centre for European Economic Research Discussion Paper No. 08-020. Available at SSRN: https://ssrn.com/abstract=1116166 or http://dx.doi.org/10.2139/ssrn.1116166

Michael Overesch (Contact Author)

Universität zu Köln ( email )

Albertus-Magnus-Platz
WiSo-Gebäude
Cologne, 50923
Germany
0221/470-5605 (Phone)

HOME PAGE: http://www.steuer.uni-koeln.de/

Dennis Voeller

University of Mannheim - Accounting and Taxation ( email )

University of Mannheim
Mannheim, 68131
Germany
+49 621 181 1638 (Phone)
+49 621 181 1665 (Fax)

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