Taxation and Capital Structure : Evidence from a Transition Economy

The authors examine the effects of taxation on financing policy using the corporate tax reform in 2001 in Croatia as a natural experiment. Since the extant literature on tax effects on capital structure studies listed firms in developed countries,...

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Bibliographic Details
Main Authors:	Klapper, Leora, Tzioumis, Konstantinos
Format:	Policy Research Working Paper
Language:	English
Published:	World Bank, Washington, DC 2012
Subjects:	ACCELERATED DEPRECIATION ACCESS TO FINANCE ACCOUNTING ADVERSE SELECTION AGENCY COSTS AGENCY PROBLEMS AMOUNT OF DEBT ARBITRAGE ASSETS RATIO ASYMMETRIC INFORMATION AUDITING BANK FINANCING BANKING SECTOR BANKING SYSTEM BANKRUPTCY BANKS BORDER TAX BORROWING BUSINESS ENVIRONMENT CAPITAL MARKETS CAPITAL STOCK CAPITAL STRUCTURE CAPITAL STRUCTURES CASH FLOW CASH FLOWS CHECKS COLLATERAL COMMON STOCK COMPLIANCE COSTS CORPORATE BONDS CORPORATE DEBT CORPORATE FINANCE CORPORATE FINANCING CORPORATE INCOME TAX CORPORATE PROFIT TAX CORPORATE TAX CORPORATE TAX RATE CORPORATE TAX RATES CORPORATE TAXES CREDIT AVAILABILITY CREDIT RATIONING CREDITORS CROATIAN NATIONAL BANK CURRENCY DEBT CAPACITY DEBT FINANCING DEBT LEVEL DEBT LEVELS DEBT POLICY DEDUCTIONS DEMAND FOR CAPITAL DEVELOPING COUNTRIES DEVELOPING ECONOMIES DIVIDEND DIVIDEND TAX DIVIDEND TAXATION DIVIDENDS ECONOMIC GROWTH EFFECTIVE TAX RATES EMERGING MARKETS EMPLOYMENT ENTERPRISE PERFORMANCE ENTREPRENEURS EQUITY CAPITAL EXISTING DEBT EXPENDITURE EXTERNAL FINANCE EXTERNAL FINANCING FINANCIAL ACCOUNTING FINANCIAL DATA FINANCIAL DEVELOPMENTS FINANCIAL DISTRESS FINANCIAL LEVERAGE FINANCIAL MANAGEMENT FINANCIAL POLICY FINANCIAL STATEMENT FINANCIAL STATEMENTS FINANCIAL STRUCTURE FINANCIAL STUDIES FINANCIAL SYSTEM FIRM PERFORMANCE FIXED ASSETS FOREIGN DIRECT INVESTMENT FOREIGN INVESTMENT FREE TRADE GLOBAL FINANCIAL STABILITY HOLDING INCOME TAX INCOME TAXES INDIVIDUAL FIRMS INFLATION INFLATION RATE INTANGIBLE INTEREST INCOME INTEREST RATE INTEREST TAX INTERNATIONAL BANK INVESTMENT PATTERNS LENDING POLICIES LEVEL OF DEBT LIABILITY LIQUIDITY LOAN LOAN RATES LOCAL CURRENCY LONG TERM DEBT LONG-TERM DEBT LONG-TERM LOAN MARGINAL TAX RATES MARKET COMPETITION MORAL HAZARD MULTINATIONALS NONPERFORMING LOANS PERSONAL INCOME PERSONAL TAX RATE PRESENT VALUE PRIVATE CREDIT PRIVATE SECTOR GROWTH PROFITABILITY PUBLIC FINANCE RAPID DEVELOPMENT REAL ESTATE RESERVES RETAINED EARNINGS RETURN RETURN ON ASSETS RETURNS RISK-FREE INVESTMENTS SHAREHOLDERS SHORT-TERM DEBT SMALL BUSINESS SMALL BUSINESS FINANCE SMALL BUSINESSES SWAPS TAX TAX ADVANTAGES TAX ARBITRAGE TAX BASE TAX BENEFITS TAX BRACKETS TAX BURDEN TAX CHANGES TAX COMPETITION TAX COMPLIANCE TAX COMPLIANCE COSTS TAX EXEMPT TAX EXEMPTIONS TAX EXPENDITURE TAX INCENTIVES TAX LAW TAX PENALTIES TAX POLICY TAX RATES TAX REDUCTION TAX REDUCTIONS TAX REFORM TAX REFORMS TAX REGIME TAX RELIEF TAX RESEARCH TAX REVENUES TAX RULES TAX SYSTEM TAX SYSTEMS TAX TREATMENT TAXATION TAXPAYERS TRANSACTION TRANSITION COUNTRIES TRANSITION ECONOMIES TRANSITION ECONOMY UNION VALUE ADDED TAX VOLATILITY
Online Access:	http://documents.worldbank.org/curated/en/2008/10/9950512/taxation-capital-structure-evidence-transition-economy http://hdl.handle.net/10986/6909

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Summary:	The authors examine the effects of taxation on financing policy using the corporate tax reform in 2001 in Croatia as a natural experiment. Since the extant literature on tax effects on capital structure studies listed firms in developed countries, it is worth investigating whether the same results apply to privately-held, small and medium size firms in transition economies. The findings provide significant evidence that lower taxes have affected the capital structure of Croatian firms, resulting in increased equity levels and decreased long-term debt levels. The authors also find that smaller and more profitable firms were more likely to reduce their debt levels. These findings are consistent with the trade-off theory of capital structure, which suggests that lower taxes decrease the incentive to hold debt due to decreasing interest tax deductibility.

Taxation and Capital Structure : Evidence from a Transition Economy

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