Corporate tax exhaustion and financial policy: evidence on Finnish data

Kimmo Virolainen
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Kimmo Virolainen: Helsinki School of Economics

Finnish Economic Papers, 1991, vol. 4, issue 2, 130-141

Abstract: This paper examines in detail the empirical implications concerning taxation and optimal borrowing of the so called tax shelter-bankruptcy cost model. It is shown that in an institutional environment which allows the use of relatively large non-debt related tax shields, it is possible that firms exhaust the tax benefit of debt financing already at riskless debt levels. This, in turn, implies that the relevance of risk factors of debt in explaining optimal financial structure may be related to the firm's expected tax status. Empirical findings on a sample of Finnish manufacturing firms support the hypothesis that there are differences in the borrowing behaviour between tax exhausted and non-tax exhausted firms.

Date: 1991
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Persistent link: https://EconPapers.repec.org/RePEc:fep:journl:v:4:y:1991:i:2:p:130-141

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