How effective is an incremental ACE in addressing the debt bias? Evidence from corporate tax returns

Nicola Branzoli and Antonella Caiumi ()
Additional contact information
Antonella Caiumi: National Institute of Statistics

International Tax and Public Finance, 2020, vol. 27, issue 6, No 5, 1485-1519

Abstract: Abstract The Allowance for Corporate Equity (ACE) introduced in Italy in 2011 has decreased the fiscal distortion between the costs of equity and debt by introducing the deductibility from taxable income of a notional return on capital increases. In this paper, we estimate the impact of the ACE on the leverage ratio of Italian manufacturing firms. Using a novel instrumental variable approach to identify the causal effect, we find that the introduction of the incremental ACE has substantially reduced the leverage ratio of its beneficiaries. We find that the effect is larger for smaller enterprises and for mature firms. In addition, the impact of the ACE is higher for vulnerable and risky firms than for sound firms. These results suggest that an incremental ACE may be an effective policy tool to reduce the leverage ratio of European firms.

Keywords: Allowance for Corporate Equity; Corporate leverage; Debt–equity bias (search for similar items in EconPapers)
JEL-codes: G32 H25 H32 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1007/s10797-020-09609-2 Abstract (text/html)
Access to full text is restricted to subscribers.

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:kap:itaxpf:v:27:y:2020:i:6:d:10.1007_s10797-020-09609-2

Ordering information: This journal article can be ordered from
http://www.springer. ... ce/journal/10797/PS2

DOI: 10.1007/s10797-020-09609-2

Access Statistics for this article

International Tax and Public Finance is currently edited by Ronald B. Davies and Kimberly Scharf

More articles in International Tax and Public Finance from Springer, International Institute of Public Finance Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().