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
Date Written: October 20, 2011
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: Suggested Citation