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

Author

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  • Savina Princen
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.

Suggested Citation

  • Savina Princen, 2012. "Taxes do Affect Corporate Financing Decisions: The Case of Belgian ACE," CESifo Working Paper Series 3713, CESifo.
    • Handle: RePEc:ces:ceswps:_3713
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    allowance for corporate equity; corporate financing decisions;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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