Corporate Taxation and its Reform: The Effects on Corporate Financing Decisions in Italy
37 Pages Posted: 14 Mar 2004
Date Written: February 2004
The aim of this paper is twofold. First, we measure the relationship between fiscal variables and companies debt choices in Italy using a dynamic representation of the modified pecking order model, where both trade-off and pecking order theories are nested. Second, our estimation results are used, jointly with some tax simulations undertaken with a company microsimulation tax-model (MATIS), to assess the effects on leverage of two recent tax reforms, that distinguishes mainly for the effect on the relative cost of debt versus equity finance. Main results suggest that: (a) fiscal effects are significant and robust explanations of firms' financial behaviour; (b) under specific assumptions, the reforms analysed would be able to induce similar reductions in firms' leverage, when compared with the situation prevailing in 1996. However, the routes through which this occurs are profoundly different (relative price in the first case, and cash flow in the second), tracing some important differences in the overall evaluation of the two reforms.
Keywords: Capital structure, Modified pecking order theory, Corporate taxes, Fiscal microsimulation, Dynamic panel models, Robustness
JEL Classification: G32, H32, C23, C11
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