EconPapers    
Economics at your fingertips  
 

From interest tax shield to dividend tax shield: A corporate financing policy for equitable and sustainable wealth creation

Qamar Uz Zaman, M. Kabir Hassan, Waheed Akhter and M.A. Meraj

Pacific-Basin Finance Journal, 2018, vol. 52, issue C, 144-162

Abstract: This study critically analyzes debt-incentivized corporate tax and financing policy and provides an Islamic perspective to this important tax deductibility debate. This study advocates that the corporate tax incentive to debt (interest tax shield) be abolished and shifted to equity (dividend tax shield). Later, we use the implications of our proposed taxation policy to reframe the firm financing model and modify M & M's firm valuation model. We use a scenario-based simulation technique and conduct various policy experiments to assess the impact of conventional and proposed tax regimes on levered and zero-levered firms and their values. We find that aligning corporate financing policy with the fundamentals of Islamic finance helps restrain corporate indebtedness and promote profit and loss sharing. According to our proposed model, firms have a reduced cost of financing, tend to be more stable, and are value oriented, especially when they avoid debt to the maximum extent. We further propose that an optimal dividend payout ratio may lead to aggregate equilibrium amongst cost of financing, firm value, and corporate tax contribution to the economy. This study provides new contributions to the discipline of Islamic corporate finance.

Keywords: Corporate finance; Islamic finance; Interest tax shield; Dividend tax shield; Stability (search for similar items in EconPapers)
JEL-codes: G32 G35 G38 H25 K34 Z12 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927538X17300343
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:pacfin:v:52:y:2018:i:c:p:144-162

DOI: 10.1016/j.pacfin.2017.01.003

Access Statistics for this article

Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee

More articles in Pacific-Basin Finance Journal from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2025-03-23
Handle: RePEc:eee:pacfin:v:52:y:2018:i:c:p:144-162