Taxes Do Affect Corporate Financing Decisions: The Case of Belgian ACE

Abstract

In this paper, I use difference-in-differences regressions to measure how the debt tax shield affects the capital structure of a company. By comparing the financial leverage of treatment and control companies before and after the introduction of an equity tax shield, I infer the impact of the tax discrimination between debt and equity. Consistent with the theoretical prediction, the estimated results show that the introduction of an equity tax shield has a significant negative effect on the financial leverage of a company. This effect amounts to approximately 2-7%, meaning that a classical tax system encourages companies to use on average 2-7% more debt than when there is an equal tax treatment of debt and equity.

Eliminating the Tax Shield through Allowance for Corporate Equity: Cross‐Border Credit Supply Effects

“…Since nonfinancial firms were also allowed to use ACE deductions one would expect that these firms borrowed less after the introduction of ACE. Indeed, the evidence in Kestens, Van Cauwenberge, and Christiaens (2012), Princen (2012), andPanier, Pérez-González, andVillanueva (2013) suggests that at least some Belgian firms reduced their leverage ratios in response to ACE, while Van Campenhout and Van Caneghem (2013) find no evidence that small and medium-sized enterprises changed their leverage. These findings are not in contradiction to our finding that Belgian banks increased the supply of syndicated loans as we keep demand for loans constant.…”

The Effect of an Allowance for Corporate Equity on Capital Structure: Evidence From Austria

“…Several studies have analyzed the effect of an ACE tax system on capital structure, with most attention being paid to the Belgian ACE tax system (Princen 2012; Van Campenhout and Van Caneghem 2013; Panier et al, 2015; Schepens 2016) and the Italian ACE tax system (Bernasconi et al, 2005; Panteghini et al, 2012; Branzoli and Caiumi 2020). Only one study evaluates the effect of ACE tax systems in a multicountry setting.…”

“…The empirical documentation of the effect of ACE tax systems on a firm's capital structure in single-country studies is limited to Belgium (Princen 2012; Van Campenhout and Van Caneghem 2013; Panier et al, 2015; Schepens 2016) and Italy (Bernasconi et al, 2005; et al, 2012; Branzoli and Caiumi 2020). The results document that ACE tax systems increase equity ratios and decrease debt ratios of firms.…”

Japan's Corporate Income Tax: Facts, Issues and Reform Options

“…There is now increasing experience from countries that have an ACE, including Belgium, Brazil, and Italy. These schemes have encountered no particular practical difficulty and, where it has been studied, the available evidence is that they have indeed reduced leverage ratios (Klemm, 2007;Princen, 2012).…”