Corporate Taxes and Firm Capital Structure: A Pooled
Cross-Section and Time-Series Analysis
Abu Taher Mollik
Accounting, Banking and Finance
Faculty of Business and Government
University of Canberra
Building 6, Room: 6C26
Email:abumollik@yahoo.com.au; abu.mollik@canberra.edu.au
Phone: (+61) 0422 239 066
Abstract
This paper examines the effect corporate taxes on the use of debt capital
or leverage in a firm’s capital structure. Several capital structure theories
argue that changes in the rate of corporation tax should directly affect the
debt-equity ratio of a firm, such that an increase in the corporate tax rate
should increase aggregate debt-equity ratios. Most of the previous
empirical studies tested the effect of corporate tax rates indirectly by
using non-debt tax shields. Unlike previous studies, this study used the
corporate tax rate on its own as a determinant of capital structure in a
pooled cross-section and time-series analysis. Applying the fixed effect
model the results reveals that a firm’s financial leverage is an increasing
function of corporate taxes, market structure, free cash flows,
collateralizable asset value, firm size, and dividend payouts and a
decreasing function of profitability, growth opportunities, uniqueness of
the products, business risk or volatility, interest rates, non-debt tax
shields and reputation. However, the significance and, in some cases, the
direction of the effects of these variables vary depending on the type of
debt, measures of leverage and the model specified. The findings of the
study have important implication for policy makers, corporate executives
and academics alike.
Keywords: Capital structure; Corporate Tax Rate; Panel Data; Fixed effect model.
JEL Classification: G32, P34