The Trade-Off and Pecking-Order Empirical Effects of Corporate Taxation on Financial Choices: A Unified Approach
32 Pages Posted: 13 Mar 2006
Date Written: December 2005
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
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