Do personal taxes affect corporate financing decisions?

Graham, John R.

doi:10.1016/s0047-2727(99)00006-7

Cited by 225 publications

(195 citation statements)

References 56 publications

(22 reference statements)

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“…They simulate firm-specific marginal tax rates over a forecasted stream of taxable income, integrating the most important dynamic features of the tax code. 3 Graham et al (1998) and Graham (1999) regress debt-to-firm values of U.S. companies on these simulated tax rates. In addition, Graham (1999) extensively examines the role of personal taxes.…”

Section: Survey Of the Empirical Evidencementioning

confidence: 99%

Capital structure choice and company taxation: A meta-study

Feld

Heckemeyer

Overesch

2013

Journal of Banking & Finance

151

107

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:http://ftp.zew.de/pub/zew-docs/dp/dp11075.pdf Non-Technical SummaryTheoretical arguments for the tax sensitivity of capital structures are convincing. Empirical findings instead have for years been rather weak. Even today, despite a surge of studies providing point estimates for the tax effect on corporate capital structure, the empirical evidence remains ambiguous. Surprisingly, however, no study has ever quantitatively examined the factors which determine the variation in empirical evidence.The contribution of this paper is to fill this gap. It provides a comprehensive quantitative review of the empirical literature on the impact of taxation on corporate debt financing. Synthesizing the evidence from over 1,000 primary estimates extracted out of 46 studies, we find that this impact is indeed quite substantial. Our results suggest that, in particular, the tax rate proxy used for identification determines the outcome of primary analyses. More refined measures like the simulated marginal tax rate suggested by Graham (1996Graham ( , 1999) avoid a significant downward bias in estimates for the debt response to tax. Moreover, we find that debt characteristics, the econometric specification, the set of control-variables, and publication selection in primary studies exert significant influence on estimated tax effects. Accounting for all potential misspecification biases by means of meta-regression analyses, we predict a marginal tax effect on the debt ratio of 0. ABSTRACTThis paper provides a quantitative review of the empirical literature on the tax impact on corporate debt financing. Synthesizing the evidence from 46 previous studies, we find that this impact is substantial. In particular, the tax rate proxy determines the outcome of primary analyses. Measures like the simulated marginal tax rate (Graham (1996a)) avoid a downward bias in estimates for the debt response to tax. Moreover, debt characteristics, econometric specifications, and the set of control-variables affect tax effects. Accounting for misspecification biases by means of meta-regressions, we predict a marginal tax effect on the debt ratio of 0.3.

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Section: Survey Of the Empirical Evidencementioning

confidence: 99%

Capital structure choice and company taxation: A meta-study

Feld

Heckemeyer

Overesch

2013

Journal of Banking & Finance

151

107

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“…In comparison to previous analyses such as that of Graham (1999) we are able to control for individual heterogeneity between companies, which might be correlated with the tax effects, by means of company-fixed effects. It should be mentioned that the companyspecific effects nest country-fixed effects and thus, remove cross-sectional heterogeneity between countries.…”

Section: Regression Resultsmentioning

confidence: 99%

“…They interpret this result as an indirect indicator for the impact of personal taxation. Graham (1999) analyses the effects of personal income taxation using cross-sectional differences in US companies' payout ratios in order to estimate the variation in personal income tax. He determines a potential net tax advantage of debt by subtracting the 'personal tax penalty' from the marginal corporate tax rate.…”

Section: Capital Structure Choice and Taxationmentioning

confidence: 99%

“…Empirical evidence with respect to the possible impact of personal capital income taxation on capital structure choices is still scarce. However, studies considering these aspects (Givoly et al, 1992;Graham, 1999;Alworth and Arachi, 2001;Lee, 2001, 2007) find significant effects of personal taxation. While previous studies are based on data from one single country, mainly the US, empirical evidence for an international sample of companies is generally lacking.…”

Section: Introductionmentioning

confidence: 99%

“…However, our elasticities are significantly higher in comparison to the previous literature based on US firm data. Graham (1999), for example, reports only a coefficient of 0.100 and Gordon and Lee (2001) report a coefficient of 0.057 for similar measures for the relative tax benefit of debt.…”

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confidence: 99%

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The Impact of Personal and Corporate Taxation on Capital Structure Choices

Overesch¹,

Voeller²

2010

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp08020.pdf Non-Technical SummaryCapital structure adjustments can be used to reduce the total tax burden on company investment since the taxation of the return on equity and debt capital differs in most countries. At the corporate level, interest payments reduce taxable profits while such a deduction is not feasible in the case of equity financing. At the shareholder level, effective tax rates on dividend and interest income differ as well. Therefore, the relative tax benefits of different sources of finance are supposed to have an impact on financing decisions.Theory suggests that both corporate profit tax and personal capital income taxes shouldbe considered in order to analyze the tax impact on capital structure choices.Since previous literature mainly focuses on the taxation of corporate profits, empirical evidence with respect to the possible impact of personal capital income taxation on capital structure choices is still scarce. Therefore, this paper aims at analyzing the effects from different taxation of equity and debt on capital structures of European firms while taking into account both personal and corporate income taxation. For the empirical analysis we employ a rich panel of firm-level financial accounting data of companies located in 23 European countries, taken from the AMADEUS data base. In contrast to other recent papers, we focus mainly on stand-alone companies. Furthermore, we collect detailed information about the tax systems of the considered countries during the period from 2000 until 2005.The empirical results suggest that a higher tax benefit of debt has the expected significant positive impact on companies' financial leverage. Additional analysis confirms that debt ratios are affected by personal income taxation: the level of dividend taxes has a positive impact on the debt to assets ratio, whereas the taxation of personal interest income negatively affects corporate leverage. In addition, we find evidence that the capital structures of smaller companies react more heavily to higher tax benefits of debt. In contrast, this tax benefit only has a minor impact on the financial decisions of parent companies belonging to a group of affiliated firms. Zusammenfassung (Summary in German)

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Capital Structure and the Cost of Capital

Luca

2018

Analytical Corporate Valuation

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Do personal taxes affect corporate financing decisions?

Cited by 225 publications

References 56 publications

Capital structure choice and company taxation: A meta-study

Capital structure choice and company taxation: A meta-study

The Impact of Personal and Corporate Taxation on Capital Structure Choices

Capital Structure and the Cost of Capital

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