Taxation and Capital Structure: Evidence from a Transition Economy

FinanzArchiv: Public Finance Analysis, Vol. 68(2), 2012.

35 Pages Posted: 27 Oct 2008 Last revised: 2 Jul 2013

Konstantinos Tzioumis

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Leora F. Klapper

World Bank; World Bank - Development Research Group (DECRG)

Multiple version iconThere are 2 versions of this paper

Date Written: October 20, 2011

Abstract

We examine the effects of taxation on financing policy using the corporate tax reform in 2001 in Croatia as a quasi-natural experiment. Since the extant literature on tax effects on capital structure studies listed firms in developed countries, it is worth investigating whether the same results apply to privately-held small and medium enterprises in transition economies. The findings provide significant evidence that lower taxes have affected the capital structure of Croatian firms, resulting in increased equity levels. These findings are consistent with the trade-off theory of capital structure, which suggests that lower taxes increase the incentive to hold equity due to decreasing interest tax deductibility of debt.

Keywords: Capital structure, Taxation, Transition Economies

JEL Classification: G32, G38, K34

Suggested Citation

Tzioumis, Konstantinos and Klapper, Leora F., Taxation and Capital Structure: Evidence from a Transition Economy (October 20, 2011). FinanzArchiv: Public Finance Analysis, Vol. 68(2), 2012.. Available at SSRN: https://ssrn.com/abstract=1130887 or http://dx.doi.org/10.2139/ssrn.1130887

Konstantinos Tzioumis (Contact Author)

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

Leora F. Klapper

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
202-473-8738 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/lklapper

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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