The effect of tax regulation on firm value: the Turkish case of Allowance for Corporate Equity (ACE) regulation

Abstract

Investors ex-ante price the tax shield that Turkish firms would enjoy and react positively to the introduction of a legislation that provides a deduction for new equity issues. Not all firms are equally affected by the equity tax shield. Cumulative abnormal returns prove significantly higher for levered firms who may find it easier to switch from debt to equity financing and for firms that have income to shield from tax. Furthermore, the most levered firms and the firms with the highest income, whom investors ex-ante expect to benefit most from the regulation, do indeed issue more equity to take advantage of the tax benefits of the new regulation.

Examining the impact of debt on investment for Austrian non-financial sectors and firms

“…Experience from other OECD countries suggests that an allowance for corporate equity can stimulate the use of equity capital and lower leverage, if designed well (e.g. de Mooij and Devereux, 2009;Hebous and Ruf, 2017;Ozdamar, Tanyeri and Akdeniz, 2020).…”

Insolvency and debt overhang following the COVID-19 outbreak: Assessment of risks and policy responses

“…In the case of Belgium, the introduction of ACE was associated with a significant decrease in financial leverage (Princenc, 2012, Panier et al, 2013 across larger firms, but no significant changes in the capital structure were found in SMEs (Campenhout and Caneghem, 2013). Empirical results for Italy (Branzoli and Caiumo, 2018), Austria (Frühwirth and Kobialka, 2011) and Turkey (Ozdamar, Tanyeri and Akdeniz, 2020) further support the view of a decrease in leverage.…”

Unleashing the full potential of the Turkish business sector

“…While the allowance amounted to TRY 481 million of foregone corporate taxes in 2019, it is expected to increase to around TRY 300 million in 2021. Empirical evidence suggests that, following the introduction, highly levered firms issued more equity capital and thus could reduce leverage (Ozdamar, Tanyeri and Akdeniz, 2020). Given the need for more equity capital to address overleveraged corporate balance sheets, authorities should consider increasing the allowance from 50% to 100% and extending the allowance to retained earnings.…”