Does corporate taxation affect cross-country firm leverage?

Antonio De Socio () and Valentina Nigro ()

No 889, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We evaluate the relation between firm leverage and taxation of corporate income using a dataset of mostly unlisted European corporations, highly representative of medium-sized and large firms. We use a correlated random effect approach in order to take into account unobserved heterogeneity and to assess the contribution of cross-sectional variation of the regressors. We also apply quantile regressions to evaluate a possible differential impact of taxation on leverage across firms. Our results suggest that corporate income taxation is positively related to leverage and explains part of the cross-country variability, showing a stronger effect for less levered firms. In accordance with the theory of the debt tax shield, the relation between debt and taxation is stronger for highly profitable firms. These findings are robust to the inclusion of different measures of the financial development and characteristics of the legal system of the country where firms are located.

Keywords: leverage; corporate taxation; financial structure (search for similar items in EconPapers)
JEL-codes: G32 H32 (search for similar items in EconPapers)
Date: 2012-11
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-cse, nep-eec, nep-eur and nep-pbe
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_889_12

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