The Trade-Off and Pecking-Order Empirical Effects of Corporate Taxation on Financial Choices: A Unified Approach

32 Pages Posted: 13 Mar 2006

See all articles by Maria Elena Bontempi

Maria Elena Bontempi

University of Bologna - Department of Economics

Silvia Giannini

University of Bologna - Department of Economics

Roberto Golinelli

University of Bologna - Department of Economics

Date Written: December 2005

Abstract

The aim of this paper is to measure the relationship between fiscal variables and corporate debt choices. Data on Italian manufacturing companies are used because of the substantial variability of the tax legislation during the sample period, as well as the availability of detailed accounting information which allows for reliable inferences. The reference model is an empirical representation of the modified pecking order (MPO) approach, where both trade-off and pecking-order theories are nested. We find that both the trade-off relative price of debt and equity finance, and the pecking-order net-of-tax cash flow, are significant, robust ways by which corporate taxation affects financing decisions.

Keywords: Capital structure, Trade-off, Pecking-order and Modified pecking-order models, Corporate taxes, Extreme bound analysis, Dynamic panel estimation

JEL Classification: G32, H32, C23, C11

Suggested Citation

Bontempi, Maria Elena and Giannini, Silvia and Golinelli, Roberto, The Trade-Off and Pecking-Order Empirical Effects of Corporate Taxation on Financial Choices: A Unified Approach (December 2005). Available at SSRN: https://ssrn.com/abstract=889568 or http://dx.doi.org/10.2139/ssrn.889568

Maria Elena Bontempi (Contact Author)

University of Bologna - Department of Economics ( email )

Strada Maggiore, 45
40125 Bologna, 40125
Italy
+39 051 2092600 (Phone)
+39 051 2092664 (Fax)

Silvia Giannini

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy

Roberto Golinelli

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy
+39 051 209 2638 (Phone)
+39 051 209 2664 (Fax)

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