The Role of Taxes in Capital Structure: Evidence from Taxed and Non-Taxed Arab Economies

42 Pages Posted: 22 Mar 2012

See all articles by Mounther Barakat PhD, CFA, CAIA, CIPM, FRM, CAMS

Mounther Barakat PhD, CFA, CAIA, CIPM, FRM, CAMS

New York University (NYU) - New York University Abu Dhabi; Emirates Securities and Commodities Authority

Ramesh P. Rao

Oklahoma State University - Stillwater - Spears School of Business - Department of Finance

Date Written: March 21, 2012

Abstract

The Arab economies present a unique opportunity to test the tax model of capital structure. These economies may be dichotomized into taxable and non-taxable states. The results support a number of implications of the tax-based theories of capital structure. We document relatively higher leverage in economies that impose a corporate income tax. We also document that leverage is significantly positive in the proxy for corporate marginal tax rate. In addition, we find that non-debt tax shield is a positive and significant determinant of capital structure in non-taxed economies, but is insignificant in taxed economies. Additionally, we find that leverage is systematically related to size, collateral, and profitability. The overall results are suggestive of the portability of capital structure theory(ies) across diverse economies.

Suggested Citation

Barakat, Phd, CFA, CAIA, CIPM, FRM, CAMS, Mounther H. and Rao, Ramesh P., The Role of Taxes in Capital Structure: Evidence from Taxed and Non-Taxed Arab Economies (March 21, 2012). Available at SSRN: https://ssrn.com/abstract=2026751 or http://dx.doi.org/10.2139/ssrn.2026751

Mounther H. Barakat, Phd, CFA, CAIA, CIPM, FRM, CAMS (Contact Author)

New York University (NYU) - New York University Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates

Emirates Securities and Commodities Authority ( email )

Hamdan Street - AL Gaith Tower -13th Floor
P.O.Box: 33733
Abu Dhabi, 00000
United Arab Emirates

Ramesh P. Rao

Oklahoma State University - Stillwater - Spears School of Business - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States
405-744-1385 (Phone)
405-744-5180 (Fax)

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