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The Impact of Personal and Corporate Taxation on Capital Structure Choices

Michael Overesch and Dennis Voeller

FinanzArchiv: Public Finance Analysis, 2010, vol. 66, issue 3, 263-294

Abstract: This paper empirically analyzes whether both personal and corporate taxation have an influence on companies´ capital structure decisions. We investigate the effect of the difference in taxation of debt and equity financing on capital structure. Our empirical results, based on a panel of European firm-level data, suggest that a higher tax benefit of debt has the expected significant positive effect on a company´s financial leverage. We find evidence that the capital structures of smaller companies respond more heavily to changes in the tax benefit of debt. Additional analysis confirms that, in particular, variation in capital income tax rates at the shareholder level implicates significant capital structure adjustments. Moreover, we find substitutive relationships between non-debt tax shields and the effect of the corporate tax rate on capital structure.

Keywords: capital structure; corporate income tax; personal income tax; firm-level data (search for similar items in EconPapers)
JEL-codes: G30 G32 H24 H25 (search for similar items in EconPapers)
Date: 2010
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