TAXES AND CAPITAL STRUCTURE: A STUDY OF EUROPEAN COMPANIES

Yue Cheng and Christopher J. Green

Manchester School, 2008, vol. 76, issue S1, pages 85-115

Abstract: We analyse the impact of tax policy on firms' leverage ratios in a balanced panel of 129 medium-sized listed European companies from 1993 to 2005. A general model of company leverage is applied within which King's tax ratios are used to capture tax policy changes, controlling for non-tax influences. Leverage measures studied include total, long-term and short-term debt. A generalized method of moments estimator is used to control for endogeneity. The results suggest that tax policy has a significant but small impact on firms' debt ratios and that non-debt tax shields are a substitute for debt in company activities. Copyright © 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd and The University of Manchester.

Date: 2008

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