Corporate tax incentives and capital structure: New evidence from UK firm-level tax returns

Devereux, Michael; Maffini, Giorgia; Xing, Jing

doi:10.1016/j.jbankfin.2017.12.004

Cited by 37 publications

(26 citation statements)

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“…The positive relations of these tax variables with indebtedness reinforce the fact that tax benefits are a driver of corporate financial leverage. This result corroborates the studies by Devereux et al (2015) and Clemente-Almendros and Sogorb-Mira (2017). Relating to the control variables, PY, ZA, and IE comply with the predicted signs and are statistically significant.…”

Section: Resultssupporting

confidence: 93%

“…According to the authors, the results -statistically significant -present a positive relationship between MTR and Altman's Z-Score with indebtedness. Devereux et al (2015) examine how corporate capital structure is affected by the corporate income tax system and by the identification strategy, based on the variation of corporate marginal tax rates, due to the existence of kinks in the corporate tax rate schedule. The study sample covers a universe of 16,124 companies presenting income tax statement in UK, with 93,259 annual observations, during the period from 2001 to 2010.…”

Section: Literature Reviewmentioning

confidence: 99%

“…According to Devereux et al (2015), the results found in the literature provide evidence that firms adapt their capital structure in response to changes in their tax rate over time and, therefore, it is more appropriate to estimate a model of capital structure adjustment. The regression model with dynamic panel is characterized by considering the inclusion of the dependent variable, as a regressed lag, which is obtained using Equation 3 (Wooldridge, 2016), where is the debt level of firm i at time t; is the target adjustment coefficient; is the constant term;…”

Section: Figure 2 Numerical Example Of the Relationship Between The mentioning

confidence: 99%

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Debt Tax Benefits in a High Tax Emerging Market: Evidence from Brazil

Peter¹,

Michele²,

Wilson³

2020

IJEBA

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Purpose: This study hypothesizes that tax benefits encourage the use of third-party capital, and seeks to verify whether the tax benefit deriving from debts has a positive effect on Brazilian companies' capital structure. Approach/Methodology/Design: Data on 259 nonfinancial companies over the period 2008-2018 are extracted from the Standard & Poor's Capital IQ database and are analyzed through regression with dynamic data panel. The variables considered as tax benefit proxies are: marginal tax rate, kink, standardized kink and tax payment.The investigations comprise: trade off theory, pecking order theory, information asymmetry, bankruptcy costs and agency theory. Findings: A positive debt effect on capital structure, taxation as providing a systematic incentive for greater leverage, and that, Brazilian companies, despite the country's heavy tax burden, are not taken full advantage of debt tax benefits. The study offers new evidence as to the speed of adjusting the indebtedness level relating to an optimal capital structure target. Brazilian companies have ground to contract more debt and maximize their tax benefit. Practical Implications: The study will contribute positively to the understanding of influence of high tax emerging market for the government, academia, banks, industry, managers, regulators, investors and other users. Originality/value: This study innovates by using MTR, kink and standardized kink to find debt tax benefits affecting emerging market companies' capital structure.

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Section: Resultssupporting

confidence: 93%

Section: Literature Reviewmentioning

confidence: 99%

Section: Figure 2 Numerical Example Of the Relationship Between The mentioning

confidence: 99%

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Debt Tax Benefits in a High Tax Emerging Market: Evidence from Brazil

Peter¹,

Michele²,

Wilson³

2020

IJEBA

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“…For recent evidence, see Faccio and Xu () and Devereux, Maffini and Xing (), and for a meta‐study, see Feld, Heckemeyer and Overesch ().…”

mentioning

confidence: 99%

How Should Business Profit Be Taxed? Some Thoughts on Conceptual Developments During the Lifetime of the IFS^*

Devereux

2019

Fiscal Studies

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This paper reviews developments since the 1970s in economic thinking about the design of taxes on business profit. It charts developments from proposals for a cash flow tax from the Meade Committee, to refinements of this in the form of an ‘Allowance for Corporate Equity’ and the levying of the cash flow tax in the country of destination. It describes how the development of international trade and investment has led to ever‐increasing problems in the international tax system with respect to economic efficiency, profit shifting, complexity and tax competition. It also identifies why a response to these problems requires a major reform in the location of taxation.

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“…are still required to present their unconsolidated statements as well, and, as explained by Devereux, Maffini, and Xing (2015), unconsolidated statement are relevant since taxation is due by individual firms and not by consolidated entities. For this reason, ignoring this issue could lead to measurement errors, considering that firms may respond to the tax rate in the location from where they operate rather than the rate in the parent company's country.…”

Section: Brazil's Unique Tax Environmentmentioning

confidence: 99%

Taxes influence on bank leverage and profit shifting

Joia¹

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How taxes affect corporate financing decisions is an important question in the capital structure literature and a challenging one to address with empirical data due to several endogeneity issues. Although many studies address this question, there is still no decisive evidence on whether tax effects are relevant, as suggested by the trade-off theory, or of third-order importance, as suggested by other theories, such as the pecking-order and market timing. This situation is especially true for the banking industry, considering that few studies include financial institutions. Regulatory concerns have commonly been accepted as dominant in banks' capital structure decisions; however, recent studies show that this assumption might be incorrect. Harmful tax competition is a related subject that has received little attention from previous capital structure studies. Profit shifting strategies, such as shifting economic activities, may also be understood as non-debt tax shields. Considering that taxation occurs at the individual firm level and that bank conglomerates have profit shifting opportunities among affiliated firms, I evaluate weather Brazilian banks are able to take advantage of the debt tax shield while accomplishing other capital structure goals at the conglomerate level. As far as I am concerned, this research is the first to gather empirical evidence on this phenomenon. Recent empirical studies have presented convincing results on tax policy changes as natural experiments to try to resolve the endogeneity problem. In this context, a two-step 11 p.p. tax rate increase applied to Brazilian banks' corporate tax rate, alongside some features of Brazil's complex and unstable tax environment, provide a unique study opportunity. This dissertation consists of a quantitative empirical research strategy using a difference-indifferences methodological approach. Results from the first corporate income tax rate increase are consistent with trade-off theory predictions and with the hypothesis that, compared to individual banks, financial conglomerates' capital structure are less affected by taxes. However, findings from the second event do not support the trade-off predictions. One possible explanation consistent with regulatory dominance on bank's capital structure decisions is that Basel III implementation with stricter regulatory requirements left little room for tax effects. Even though results are mixed, this research provides evidence on how tax legislation can be used to help achieve regulatory goals.

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Corporate tax incentives and capital structure: New evidence from UK firm-level tax returns

Cited by 37 publications

References 40 publications

Debt Tax Benefits in a High Tax Emerging Market: Evidence from Brazil

Debt Tax Benefits in a High Tax Emerging Market: Evidence from Brazil

How Should Business Profit Be Taxed? Some Thoughts on Conceptual Developments During the Lifetime of the IFS^*

Taxes influence on bank leverage and profit shifting

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Corporate tax incentives and capital structure: New evidence from UK firm-level tax returns

Cited by 37 publications

References 40 publications

Debt Tax Benefits in a High Tax Emerging Market: Evidence from Brazil

Debt Tax Benefits in a High Tax Emerging Market: Evidence from Brazil

How Should Business Profit Be Taxed? Some Thoughts on Conceptual Developments During the Lifetime of the IFS*

Taxes influence on bank leverage and profit shifting

Contact Info

Product

Resources

About

How Should Business Profit Be Taxed? Some Thoughts on Conceptual Developments During the Lifetime of the IFS^*