Rebound Effect of Allowance for Corporate Equity on Debt Bias

Marcio Portal and Luís Laureano

No 15-06, Working Papers Series 2 from ISCTE-IUL, Business Research Unit (BRU-IUL)

Abstract: We analyse if the Brazilian Allowance for Corporate Equity (ACE-type system) reduces the debt tax bias. Specifically, we study if the continuous treatment effect of interest on equity negatively affects the level of financial leverage. We find that the tax policy implemented is similar to the deductible cash dividends and not to an ACE. The empirical implication is that the interest on equity treatment increases the debt tax bias, producing a rebound effect to what is expected for this policy on the risk-taking behaviour and corporate capital structure. This rebound effect is homogeneous in firms with different financial constraints status. There are evidences that shareholders influence the cash distribution policy, adjusting the later to their own tax preferences.

Keywords: capital structure; debt bias; dividend; dose-response function; financial constraints; taxation (search for similar items in EconPapers)
JEL-codes: G32 G35 H20 H25 (search for similar items in EconPapers)
Date: 2015-12-16
New Economics Papers: this item is included in nep-cfn
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