This paper is extracted from a chapter of Yue Cheng's PhD thesis at Loughborough University: ‘Company Capital Structure and Tax: a Study of Mid-sized European Companies’ (Cheng, 2008). We thank participants in the September 2007 Birmingham Money, Macroeconomics and Finance (MMF) Conference and seminar participants at Loughborough University for their useful comments on earlier drafts. Thanks also to the referees and editors of this journal for their insightful comments on the work.
TAXES AND CAPITAL STRUCTURE: A STUDY OF EUROPEAN COMPANIES
Article first published online: 21 NOV 2008
© 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd and The University of Manchester
The Manchester School
Volume 76, Issue Supplement s1, pages 85–115, September 2008
How to Cite
CHENG, Y. and GREEN, C. J. (2008), TAXES AND CAPITAL STRUCTURE: A STUDY OF EUROPEAN COMPANIES. The Manchester School, 76: 85–115. doi: 10.1111/j.1467-9957.2008.01082.x
- Issue published online: 21 NOV 2008
- Article first published online: 21 NOV 2008
We analyse the impact of tax policy on firms' leverage ratios in a balanced panel of 129 medium-sized listed European companies from 1993 to 2005. A general model of company leverage is applied within which King's tax ratios are used to capture tax policy changes, controlling for non-tax influences. Leverage measures studied include total, long-term and short-term debt. A generalized method of moments estimator is used to control for endogeneity. The results suggest that tax policy has a significant but small impact on firms' debt ratios and that non-debt tax shields are a substitute for debt in company activities.