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The role of taxes in capital structure: evidence from taxed and non-taxed Arab economies

Mounther Barakat and Ramesh Rao ()

MPRA Paper from University Library of Munich, Germany

Abstract: The Arab economies present a unique opportunity to test the tax model of capital structure. These economies may be dichotomized into taxable and non-taxable states. The results support a number of implications of the tax-based theories of capital structure. We document relatively higher leverage in economies that impose a corporate income tax. We also document that leverage is significantly positive in the proxy for corporate marginal tax rate. In addition, we find that non-debt tax shield is a positive and significant determinant of capital structure in non-taxed economies, but is insignificant in taxed economies. Additionally, we find that leverage is systematically related to size, collateral, and profitability. The overall results are suggestive of the portability of capital structure theory(ies) across diverse economies.

Keywords: Capital Struacutre; Arab Economies; Taxes; Debt Tax Shiled (search for similar items in EconPapers)
JEL-codes: E62 F3 G3 G32 (search for similar items in EconPapers)
Date: 2003-08, Revised 2006-08
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