Valuing the Interest Tax Shield in the Central European Economies: Panel Data Approach

Abstract

Capital structure is one of the most frequently discussed issues within Corporate Finance Theory. Optimizing the capital structure and value of the tax shield through the evaluation of its interests can lead to the increasing value of the enterprise, followed by the rising competitiveness and flexibility. The aim of this study is to provide a novel look at the value of the interest tax shield and its determinants in the emerging economies of the Visegrad Four. The model was created on a net sample of nearly 7,000 profitable enterprises between 2015 and 2019 using a one-way fixed effects model of panel data. Regional model results show five main determinants of the debt tax shield (Tangibility, Current Ratio, Gearing, Cost of debt and Size). Others, such as non-debt tax shield, business growth or profitability, are regional, and their impact varies depending on the economic conditions of the countries. The direction of influence of the main determinants indicates that, contrary to the assumed trade-off theory, profitable companies manage the capital structure and the value of tax shield according to the pecking order or modified pecking order theory. The tax shield is made up mostly of interest on short-term loans, which increases the risk of financial distress. There is a hierarchy of funding sources, from trade credit, through shortterm loans, to long-term loans, which are used in the analysed firms to the smallest extent. The structure of liabilities may be considered another determinant of the debt tax shield.

Shareholder personal risk and firm risk: An empirical analysis of share pledges and firm debt policies

“…Further research found that the risk transfer motive of ultimate owners with high personal leverage after pledging equity, rather than the motive to avoid the transfer of control, is an influential mechanism driving the transfer of personal risk to the firm. In addition, previous literature has found that debt structure is an important factor in debt tax protection (Kovacova et al, 2022), while this paper found that debt structure also affects corporate risk-taking capacity. Moreover, previous literature has examined a firm life cycle perspective and found that firms provide distorted financial statements to obtain more favorable debt covenants (Durana et al, 2021).…”

Impact of management’s irrational expectations on corporate tax avoidance: A mediating effect based on level of risk-taking

“…In line with previous research, when carrying out the principal regression hypothesis test this study controls for variables that affect corporate tax avoidance activities. Specific indicators include enterprise leverage (Lev; Kovacova et al, 2022 ), operating income growth ratio (Growth), tax collection and management intensity (TE), cash flow ratio (Cash), book-to-market ratio (BM), shareholding status of major shareholders (Top1), natural logarithm of asset size (LnSize), and Occupy and Year dummy variables for major shareholders. Table 1 gives the definitions of the variables.…”

Application of Trade-off Theory in Real-Life Corporate Capital Structure Adjustments

“…According to the trade-off theory, the optimal level of leverage for a firm is the marginal benefit from an increase in debt is equal to the marginal cost of the risk of bankruptcy, and an increase in the probability of bankruptcy of a firm leads to a deviation from the optimal level of leverage in the firm's actual leverage, Howe and Jain wanted to test the accuracy of the theory by selecting US manufacturing firms in the aftermath of the terrorist attacks of 11 September 2001 and using a hypothetical test with an H 0 of a high-debt firm as opposed to a low-debt firm having a more pronounced response to the stock market reaction after the terrorist attacks is more pronounced [7].…”