Debt and debt tax benefit: Evidence from Indonesia debt-to-equity cap reform

Timbul Parasian Hutahean, Wawan Hermawan, Bayu Kharisma and Alfiah Hasanah

Journal of Economics and Business, 2024, vol. 132, issue C, No S0148619524000596

Abstract: This study scrutinizes the effects of Indonesia’s 2016 debt-to-equity cap reform (thin capitalization rule) on capital structure, highlighting the role of debt tax benefits. The reform curtails debt tax benefits and furnishes a quasi-experimental setting, allowing a comparison between firms affected by the reform and those unaffected. Focusing on private firms and employing an entropy balancing weighted difference-in-difference approach, we elucidate that the reform results in a substantial 9.7 percentage point reduction in the debt ratio and a 5.3 percentage point increase in the stock ratio. Additionally, utilizing a pseudo tax cut reform framework combined with an isolated impact of the zero marginal debt tax benefit, we identify an implied tax elasticity of debt around 0.88, contributing to the observed decline in the debt ratio. Notably, smaller firms exhibit a more pronounced response, and the stock ratio undergoes a significant metamorphosis, suggesting the need for nuanced policy adjustments. Overall, the study underscores the profound influence of debt tax benefits in shaping corporate financing decisions.

Keywords: Debt; Capital structure; Debt tax benefit; Debt to equity; Thin capitalization rule; Tax elasticity of debt; Entropy balancing; Difference-in-difference (search for similar items in EconPapers)
JEL-codes: C32 G32 H25 (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0148619524000596
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:132:y:2024:i:c:s0148619524000596

DOI: 10.1016/j.jeconbus.2024.106217

Access Statistics for this article

Journal of Economics and Business is currently edited by Emanuele Bajo and Moritz Ritter

More articles in Journal of Economics and Business from Elsevier
Bibliographic data for series maintained by Catherine Liu ().