Taxation and Capital Structure: Evidence from a Transition Economy

24 Pages Posted: 20 Apr 2016

See all articles by Leora F. Klapper

Leora F. Klapper

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

Konstantinos Tzioumis

ALBA Graduate Business School

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2008

Abstract

The authors examine the effects of taxation on financing policy using the corporate tax reform in 2001 in Croatia as a 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 size firms in transition economies. The findings provide significant evidence that lower taxes have affected the capital structure of Croatian firms, resulting in increased equity levels and decreased long-term debt levels. The authors also find that smaller and more profitable firms were more likely to reduce their debt levels. These findings are consistent with the trade-off theory of capital structure, which suggests that lower taxes decrease the incentive to hold debt due to decreasing interest tax deductibility.

Keywords: Debt Markets, Taxation & Subsidies, Emerging Markets, Banks & Banking Reform, Access to Finance

Suggested Citation

Klapper, Leora F. and Tzioumis, Konstantinos, Taxation and Capital Structure: Evidence from a Transition Economy (October 1, 2008). World Bank Policy Research Working Paper Series, Vol. , pp. -, 2008. Available at SSRN: https://ssrn.com/abstract=1293166

Leora F. Klapper (Contact Author)

World Bank ( email )

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

World Bank - Development Research Group (DECRG)

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United States

Konstantinos Tzioumis

ALBA Graduate Business School ( email )

6-8 Xenias St.
Athens, 11528
Greece

HOME PAGE: http://www.alba.acg.edu/faculty-research/about-alba-faculty/core-faculty/kostas-tzioumis/

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