Clemen e-Almend os, José A.; Sogo b-Mi a, F ancisco
A icle
The e ec o axes on he deb policy o spanish lis ed
companies
SERIEs - Jou nal o he Spanish Economic Associa ion
P o ided in Coope a ion wi h:
Spanish Economic Associa ion
Sugges ed Ci a ion: Clemen e-Almend os, José A.; Sogo b-Mi a, F ancisco (2016) : The e ec o
axes on he deb policy o spanish lis ed companies, SERIEs - Jou nal o he Spanish Economic
Associa ion, ISSN 1869-4195, Sp inge , Heidelbe g, Vol. 7, Iss. 3, pp. 359-391,
h ps://doi.o g/10.1007/s13209-016-0147-4
This Ve sion is a ailable a :
h ps://hdl.handle.ne /10419/158561
S anda d-Nu zungsbedingungen:
Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen
Zwecken und zum P i a geb auch gespeiche und kopie we den.
Sie dü en die Dokumen e nich ü ö en liche ode komme zielle
Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich
machen, e eiben ode ande wei ig nu zen.
So e n die Ve asse die Dokumen e un e Open-Con en -Lizenzen
(insbesonde e CC-Lizenzen) zu Ve ügung ges ell haben soll en,
gel en abweichend on diesen Nu zungsbedingungen die in de do
genann en Lizenz gewäh en Nu zungs ech e.
Te ms o use:
Documen s in EconS o may be sa ed and copied o you pe sonal
and schola ly pu poses.
You a e no o copy documen s o public o comme cial pu poses, o
exhibi he documen s publicly, o make hem publicly a ailable on he
in e ne , o o dis ibu e o o he wise use he documen s in public.
I he documen s ha e been made a ailable unde an Open Con en
Licence (especially C ea i e Commons Licences), you may exe cise
u he usage igh s as speci ied in he indica ed licence.
h p://c ea i ecommons.o g/licenses/by/4.0/
SERIEs (2016) 7:359–391
DOI 10.1007/s13209-016-0147-4
ORIGINAL ARTICLE
The e ec o axes on he deb policy o spanish lis ed
companies
José A. Clemen e-Almend os1·F ancisco Sogo b-Mi a2
Recei ed: 20 Feb ua y 2015 / Accep ed: 29 June 2016 / Published online: 15 July 2016
© The Au ho (s) 2016. This a icle is published wi h open access a Sp inge link.com
Abs ac This s udy explo es he ole o axes in explaining companies’ inancing
decisions. We es whe he he co po a e ax shields explana ion o capi al s uc u e
is applicable o i ms lis ed on he Spanish s ock exchange o e he pe iod 2007–
2013. Taxes a e ound o be economically and s a is ically signi ican de e minan s o
capi al s uc u e. Ou esul s sugges ha ma ginal ax a es a ec he deb policies
o Spanish lis ed companies, and he exis ence o non-deb ax shields cons i u es an
al e na i e o he use o deb as a ax shel e . Consis en wi h heo e ical expec a ions,
he e is a s onge ela ion be ween deb and axa ion in less le e ed i ms. Finally,
we empi ically es ima e he impac o he new hin-capi aliza ion ule pu o h by he
Spanish go e nmen in 2012 on he inancing beha iou o Spanish lis ed companies.
F ancisco Sogo b-Mi a g a e ully acknowledges inancial suppo om Minis y o Economy and
Compe i i eness Resea ch G an ECO2015-67035P. The au ho s wish o hank he Co-Edi o , Manuel
Bagues, and wo anonymous e e ees o Jou nal o he Spanish Economic Associa ion (SERIEs) o
insigh ul sugges ions and ad ices ha subs an ially imp o ed his pape in many ways. We a e also
g a e ul o Juan Ayuso om Banco de España and Domingo Ga cía om Bolsas y Me cados Españoles
o hei help in p o iding some economic and inancial da a. Finally, we would also like o hank Pankaj
Sinha, An onio Ruiz-López, Juan A. Sanchis-Llopis, Juan M. Villa-Lo a, Anna Told á-Sima s
(discussan ) and he pa icipan s a he XXII Finance Fo um a Uni e si y o Za agoza in 2014 and he
Resea ch Semina a Uni e si y o Valencia in 2015 o help ul discussions and use ul commen s on
p e ious d a s o his pape . Any e o s a e ou sole esponsibili y.
BF ancisco Sogo b-Mi a
[email p o ec ed]
José A. Clemen e-Almend os
[email p o ec ed]
1Depa amen o de Emp esa, EDEM Escuela de Emp esa ios, Ma ina Real Juan Ca los I, Muelle
de la Aduana s/n, 46024 Valencia, Spain
2Depa amen o de Economía y Emp esa, Uni e sidad CEU Ca denal He e a, Plaza Reyes Ca ólicos
19, 03204 Elche (Alican e), Spain
123
360 SERIEs (2016) 7:359–391
Ou empi ical e idence suppo s he exis ence o a ax e o m e ec , whe e companies
a ec ed by in e es deduc ibili y limi a ions educe hei le e age mo e han companies
ha a e no a ec ed.
Keywo ds Capi al s uc u e ·Co po a e axes ·Deb ·Ma ginal ax a e ·
Thin-capi aliza ion ule
JEL Classi ica ion C33 ·G32 ·H25
1 In oduc ion
A la ge body o esea ch has examined he e ec s o co po a e axa ion. Al hough he
esul s o empi ical models a y signi ican ly, he majo i y o his esea ch does ind
ha , o some deg ee, axes in luence a b oad ange o co po a e inancial decisions
such as inancing policy, in es men policy o co po a e eo ganiza ion and hedging.1
The magni ude o hese e ec s and hei o e all impac on he economy a e s ill
unde deba e. No wi hs anding, he mos signi ican obs acle a policy make con on s
in deciding on he ax ea men o co po a e deb and equi y inancing is ha he
impac o axa ion on co po a e inancial policy is no en i ely unde s ood. In addi ion,
G aham (2013) e iews a numbe o s udies ha sugges ha axes in luence inancing
decisions; howe e , his e ec is no always s ong. Likewise, he concludes ha mo e
esea ch is needed o a be e unde s anding o he in luence o axes on capi al
s uc u e, pa icula ly ela ed o ime-se ies e ec s. The e o e, whe he and o wha
ex en axa ion a ec s he choice o capi al s uc u e is s ill an unse led opic, dese ing
u he s udy.
The me a-s udy o he exis ing empi ical s udies conduc ed by Feld e al. (2013)
concludes ha capi al s uc u e choices a e indeed posi i ely a ec ed by axes, an e ec
which is also quan i a i ely ele an . Tax a es a e shown o be co ela ed wi h co po-
a e capi al s uc u e choices, which sugges s ha i ms may inc ease alue h ough
op imal deb choice. The ade-o heo y o capi al s uc u e o e s a heo e ical expla-
na ion o he ela ionship be ween co po a e deb policy and axes. Speci ically, his
heo y a gues ha i ms de e mine hei op imal deb a io by compa ing he p esen
alue o addi ional ax sa ings and o he addi ional expec ed cos o inancial dis ess
caused by a ma ginal inc ease in deb . The e has been ela i ely limi ed empi ical
esea ch in o he e ec s o ma ginal co po a e ax on deb policy, despi e i s clea
signi icance. In his ega d, G aham (1996a), as well as he subsequen s udies, ound
ha ma ginal co po a e ax a e does in luence he deb policies o US i ms.2In coun-
ies o he han he US, Alwo h and A achi (2001) conduc ed a simila analysis using
a da a panel on I alian i ms and ound a posi i e ela ionship be ween i m-speci ic
ma ginal ax a es and I alian i ms’ deb policy. In addi ion, Kunieda e al. (2011),
Ha mann-Wendels e al. (2012) and Sinha and Bansal (2013) ob ained analogous
1A de ailed e iew o he li e a u e on he ole o axes in co po a e inance is p o ided by G aham (2008,
2013).
2A comp ehensi e su ey o ela ed li e a u e can be ound in G aham (2003,2008,2013).
123
SERIEs (2016) 7:359–391 361
esul s o Japanese, Ge man and Indian i ms, espec i ely. To he bes o ou knowl-
edge, he e ha e been no empi ical s udies o da e on he e ec s o simula ed ma ginal
ax a es on deb policy in Spain.
In he a ea o public inance, ecen deba e abou co po a e ax e o m has ocused
on he consequences o asymme ic ax ea men o equi y and deb inancing. US
and Eu opean iscal au ho i ies ha e conside ed limi ing he abili y o companies o
deduc in e es paymen s om axable income, as well as calling o equal ea men
o equi y and deb . Some examples a e he Comp ehensi e Business Income Tax
(CBIT) p oposal by he US T easu y, he Mi lees Re iew p oposals o he UK ax
sys em o he Resolu ion o he ECOFIN Council Mee ing o June 8, 2010, which
ecommended o Eu opean Union membe S a es he adop ion o hin-capi aliza ion
ules.3The eason o his is ha he ax- a ou ed s a us o deb has educed ax
e enue collec ion and supposedly encou aged a “deb bias” whe eby ax incen i es
encou age companies o use ex a deb . In his ega d, i is belie ed ha excessi e
use o deb inancing inc eases i ms’ p obabili y o becoming inancially dis essed
and he eby exace ba es o pe haps e en causes economic down u ns. Acco ding o
Mooij (2011), al hough he exis ence o deb in he capi al s uc u e did no cause he
inancial c isis, excessi e le e age makes i ms mo e ulne able o economic shocks
and he e o e deb bias migh ha e con ibu ed o he ex en o he c isis.
The main objec i e o his s udy is o analyse he ela ionship be ween axes and
deb inancing using panel da a on Spanish lis ed companies. Mo e speci ically, we
ocus on how he deduc ibili y o deb in e es a ec s he capi al s uc u e o i ms. Ou
empi ical analysis is based on a sample o Spanish lis ed i ms o he pe iod 2007–
2013. We es he hypo hesis ha companies ha e a ax incen i e o use deb inancing
a he han equi y inancing because in e es paid is ax-deduc ible while di idends
paid o sha eholde s a e no . Besides, we use he She lin (1990) and G aham (1996a)
expec ed ma ginal ax a e app oach o examine he e ec s o ax on he deb policies o
Spanish i ms. In addi ion, we es he non-deb ax shields hypo hesis which conside s
o he ax shel e s di e en om he in e es allowances. In he ime pe iod analysed,
he Co po a e Tax Income Law was e o med and his ac migh ha e in luenced he
deb policy o Spanish lis ed companies. Fo ha eason, we es o a ax e o m e ec
and conside his shock as a quasi na u al expe imen o ou esea ch.
This pape con ibu es o he exis ing li e a u e on he impac o co po a e axa ion
on i ms’ capi al s uc u e, u he de eloping he con ibu ions o p e ious li e a u e
in di e en ways. Fi s ly, we p o ide addi ional empi ical e idence on he ela ion-
ship be ween axes and deb inancing. In con as wi h o he pape s, ou measu e o
le e age includes only inancial deb and di ec ly excludes o he liabili ies such as
ade payables, which mainly depend on business ansac ions and no on he e ec
o co po a e axa ion. Secondly, ou indings shed some ligh on his issue in he
Eu opean Union, which has ecei ed li le a en ion o da e in he li e a u e. Mo e-
o e , In e na ional Financial Repo ing S anda ds we e adop ed in Spain on Janua y
3Thin-capi aliza ion e e s o when a company is inanced wi h a high le el o deb ela i e o equi y.
In u n, hin-capi aliza ion ules imply ha a company ha has oo much deb compa ed o equi y will be
denied iscal deduc ions o pa o i s in e es paymen s, o ha pa o in e es paymen s will be eclassi ied
as di idends and will no ob iously be conside ed as iscal deduc ions.
123
362 SERIEs (2016) 7:359–391
1s 2007, which allows meaning ul compa ison be ween ou esul s and hose om
o he economies ha ha e also implemen ed hese in e na ional s anda ds. Thi dly, we
ake in o accoun he Spanish co po a e ax e o m in 2012, as an exogenous shock,
which enac ed a new hin-capi aliza ion ule limi ing he ax deduc ibili y o inancing
expenses. Besides, and as simila ax e o ms ha e been conduc ed in many OECD
coun ies, we belie e ha ou conclusions migh be po able o o he se ings. Applying
a di e ence in di e ences app oach, we analyse he po en ial impac o he abo emen-
ioned e o m. Finally, we s udy a special pe iod pa ially cha ac e ized by a se e e
economic and inancial c isis ha has d ama ically a ec ed Eu opean Medi e anean
coun ies such as Spain.
Ou indings show ha ma ginal ax a es signi ican ly a ec he deb policy o
Spanish lis ed i ms. The esul s a e consis en wi h he signi icance o co po a e axes
in company inancing decisions conside ing he uniqueness o he Spanish ax p o-
isions. As expec ed, he e is a s onge ela ionship be ween axes and deb policy
in less le e ed companies. Fu he mo e, he exis ence o non-deb ax shields con-
s i u es an al e na i e o he use o deb as a ax shel e . Rega ding he co po a e ax
income e o m app o ed by he Spanish Go e nmen in 2012, we ound ha he new
hin-capi aliza ion ule po en ially a ec ed 28 % o he companies in ou sample.
On a e age, hese companies had highe deb a ios han hei non-a ec ed coun e -
pa s, and a e he e o m, he o me g oup on a e age displayed s onge declining
deb a ios as compa ed o he la e one. Ou analysis p o ides empi ical e idence
consis en wi h a ax e o m e ec .
The emainde o he pape is s uc u ed as ollows. The nex sec ion analyses he
heo e ical amewo k o he s udy and p esen s he hypo heses o be es ed. Subse-
quen ly, he Spanish co po a e ax legisla ion is desc ibed in Sec . 3, including he new
hin-capi aliza ion ule. In Sec . 4, we discuss he a iables de ini ions, and explain he
es ima ion o companies’ ma ginal co po a e ax a es. The ea e , Sec . 5p o ides a
desc ip ion o ou sample and analyses desc ip i ely he ax da a. The empi ical model
speci ica ion, econome ic me hodology and he esul s a e discussed in Sec . 6.Se -
e al obus ness checks a e p esen ed in Sec . 7, and he inal sec ion d aws some
concluding ema ks.
2 Theo e ical ounda ion and hypo heses de elopmen
Modigliani and Mille (1963) we e he i s o in oduce he idea ha co po a e axa ion
a ec s he capi al s uc u e o i ms. In pa icula , hey showed ha when co po a e
income is axed and deb in e es is a deduc ible expense, i m alue can be inc eased
by using deb inancing a he han unding en i ely wi h equi y. In his con ex , he
inc ease in a i m’s alue is due o he deb ax shield. The ques ion o why deb
inancing has adi ionally ecei ed a ou able ax ea men whe eas equi y inancing
has no , seems likely o be he esul o his o ical o ces a he ime he ax ules
we e being de eloped, a he han any weigh y economic easoning pe aining o
con empo a y economic o business ci cums ances (S ebulae and Whi ed 2012).
Ea lie empi ical a icles did no ind con incing e idence ha axa ion a ec ed
i ms’ inancial policy (see o example, B adley e al. 1984;Ti man and Wessels 1988).
123

SERIEs (2016) 7:359–391 363
These discou aging esul s led Mye s (1984) o s a e in his enowned P esiden ial
Add ess o he Ame ican Finance Associa ion ha “we don’ know how i ms choose
hei capi al s uc u es as he e is no s udy clea ly demons a ing ha a i m’s ax
s a us has p edic able, ma e ial e ec s on i s deb policy”. The me a-analysis by Feld
e al. (2013) sugges s ha e y small o e en nega i e ax es ima es ound in he
s udies do no accu a ely e lec deb esponse o axes. I seems di icul o conduc
an e ec i e analysis o a di ec ela ionship be ween ax a es and deb policy, as mos
la ge co po a ions ha e he same s a u o y ax a e.4In mos de eloped coun ies, he
s a u o y ax laws do no demons a e any subs an ial a ia ion in co po a e s a u o y
ax a es o e he yea s and ac oss i ms. In he absence o a ia ion in ax a es
h ough ime and ac oss companies, we can only p esume a simila deb policy o
each company, which is no he case, o we may end up wi h con adic o y esul s.
Due o asymme ic ax ea men o co po a e p o i s and losses, he (expec ed)
ma ginal ax a e may no be equal o he s a u o y ax a e. Speci ically, al hough he
s a u o y ax a e is applied when he axable income o a company is posi i e, no
co po a e ax is imposed when he axable income is nega i e. E en in cases whe e
a company ac ually pays ze o ax in a yea due o incu ed losses, i s ma ginal ax
a e may be non-ze o. In such a case he ma ginal ax a e is equal o he discoun ed
alue o he axes paid on he ma ginal uni o income in he i s yea whe e he i m
is expec ed o ha e posi i e axable income. Likewise, losses can ypically be ca ied
o wa d and ca ied backwa d in he co po a e ax sys em, which leads o di e ences in
he ma ginal ax a es. This dynamic dimension o axes makes i necessa y o o ecas
u u e axable income in o de o es ima e cu en -pe iod ax a es and ax incen i es.
Recognizing he exis ence o loss ca ied o wa d and ca ied backwa d in he US
co po a e ax sys em, Mackie–Mason (1990) analysed he e ec s o he ma ginal ax
a e on deb policy. He ound ha when a company has loss ca ied o wa d and
in es men ax c edi (i.e., ano he ax shield), i is less likely o aise capi al by new
deb issue. Since bo h exis ing loss ca ied o wa d and in es men ax c edi a e
subs i u es o new deb issue in e ms o ax sa ings, his esul is consis en wi h he
ade-o heo y.
She lin (1990) implemen ed he Mon e Ca lo me hod using a simple linea p ojec-
ion o axable income based on ac ual pas da a o simula e u u e axable income.
Then, using simula ed axable income se ies and applying US co po a e ax law, he es i-
ma ed he (expec ed) ma ginal ax a es o indi idual i ms. Also using his app oach,
G aham (1996a) analysed he e ec s o ma ginal ax a e on US i ms’ deb policy.
He ound a posi i e ela ionship be ween he i m-speci ic ma ginal ax a e and he
change in deb a io.
Con e sely, he e a e o he empi ical s udies using s a u o y ax a es o a e -
age/e ec i e ax a es as p oxies o ma ginal ax a es (see in e alia B adley e al.
1984;T eze an 1992;Shum 1996;Sogo b-Mi a 2005;De Jong e al. 2008). These
subs i u es o ax a es, howe e , a e p oblema ic in ha hey in oduce a signi ican
4S a u o y ax a es a e hose pe cen age a es es ablished by he ax law. Con e sely, ma ginal ax a es
ela e o he ax a e a ibu able o he speci ic company’s ac i i y and o explici decisions ha may in ol e
axes paid (o sa ed) and income ecei ed (o expenses paid) o e se e al yea s; hey can be de ined as he
p esen alue o cu en and expec ed u u e axes paid on an addi ional uni o income ea ned oday.
123
364 SERIEs (2016) 7:359–391
downwa d bias in es ima es i po en ial endogenei y bias is no deal wi h. Acco d-
ingly, Feld e al. (2013) s a e ha he simula ed ma ginal ax a es sugges ed by G aham
(1996a) o e he ad an age o a oiding a signi ican downwa d bias in es ima ion. Fu -
he mo e, G aham (1996b) and Plesko (2003) show ha he simula ion app oach is
he bes a ailable p oxy o he “ ue” ma ginal ax a e. In pa icula , i is p e e able
o simply using a iables ha a e assumed o be highly co ela ed wi h ma ginal ax
a es, such as s a u o y ax a es, dummies which indica e whe he a i m is epo ing
losses o icho omous a iables, such as hose used in Byoun (2008)o G opp (2002).
Ou i s and main hypo hesis ollows di ec ly om he heo e ical a ionale and
empi ical e idence discussed p e iously, and is o mula ed as: “Since highe ma ginal
ax a es aise he alue o ax sa ings, ma ginal ax a es should be posi i ely ela ed
o i ms’ deb policy” (Hypo hesis 1).
DeAngelo and Masulis (1980) in oduced he idea o ax shield subs i u ion, which
con ends ha holding in es men (and hence expec ed income) cons an , deb in e es
compe es wi h o he allowable deduc ions as ax shel e . Fo example, i a mo e gene -
ous ax ule inc eases he i m’s dep ecia ion allowance, hen he i m’s op imal le el
o deb should dec ease due o i s lowe alue as a ax shield. The e o e, i ms can
subs i u e non-deb ax shields o deb ax shields. Following his a ionale, i ms wi h
a la ge amoun o non-deb ax shields will ha e lowe le els o deb han i ms wi h a
small amoun o non-deb ax shields. Acco ding o he deb subs i u ion hypo hesis,
he e should be a nega i e ela ionship be ween non-deb ax shields and deb usage.
In his con ex , Mackie–Mason (1990) highligh s he ac ha he ax shield sub-
s i u e hypo hesis o DeAngelo and Masulis (1980) is mo e applicable o i ms ha
a e close o being ax exhaus ed (i.e., i ms ha ha e a high p obabili y o losing he
deduc ibili y o hei ax shields). T eze an (1992) e e s o his as he ax exhaus ion
hypo hesis. Mo eo e , Mackie–Mason (1990) akes issue wi h DeAngelo and Masulis
(1980) by poin ing ou ha i ms wi h mo e p o i able p ojec s end o ha e la ge
amoun s o bo h dep ecia ion and bo owing, and he e o e non-deb ax shields may
ha e a posi i e a he han a nega i e associa ion wi h le e age. In o de o iden i y he
e ec o deb subs i u ion on ax exhaus ion and p o i abili y, Mackie–Mason (1990)
p oposes conside ing no only non-deb ax shields bu also he p obabili y o bank-
up cy. I is likely ha non-deb ax shields a e a deb subs i u e o companies nea
bank up cy and he e o e nea o ax exhaus ion. Con e sely, inancially heal hy com-
panies ha a e a om ax exhaus ion may join ly exploi bo h deb and non-deb ax
shields.
Hence ou second hypo hesis can be o mula ed as: “Non–deb ax shields on a
s and-alone basis, should be posi i ely ela ed o i ms’ deb policy and non-deb ax
shields, weigh ed by he p obabili y o bank up cy, should be nega i ely ela ed o
i ms’ deb policy” (Hypo hesis 2).
A s eam o empi ical esea ch ha e examined he impac o axes on he inancing
decisions o i ms using ax e o ms as na u al expe imen s. In his sense, changes in
he ax sys em a e used as exogenous shocks o analyse whe he companies espond
as p edic ed by heo y. Rep esen a i e wo k in his ield includes, bu is no limi ed o,
Alwo h and A achi (2001), An (2012), Panie e al. (2013), Doidge and Dyck (2015),
Faccio and Xu (2015), and Heide and Ljungq is (2015). A pa icula a ea wi hin
his esea ch deals wi h he ela ionship be ween hin-capi aliza ion ules o o he
123
SERIEs (2016) 7:359–391 365
in e es deduc ion es ic ions and company capi al s uc u e decisions. Albe e ns
and Su e h (2015), and D eßle and Scheue ing (2015) in es iga e empi ically he
impac o in oducing a limi a ion o he in e es iscal deduc ibili y in he cou se o
he Ge man co po a e ax e o m o 2008. They all ind e idence o he impac o
such hin-capi aliza ion ule on companies’ deb a io; speci ically, companies ha a e
a ec ed by he in e es ba ie educe hei le e age ypically mo e han companies
ha a e no a ec ed. Con e sely, Blouin e al. (2014) examine he impac o hin-
capi aliza ion ules ha limi he ax deduc ibili y o in e es on he capi al s uc u e o
he o eign a ilia es o US mul ina ionals in 54 coun ies. In line wi h p e ious s udies,
hey ca e ou a signi ican deb - educing e ec o di e en hin-capi aliza ion ules
on o eign pa ne s’ deb .
Based on he abo emen ioned discussion and aking he oppo uni y ha o e s
he Spanish co po a e ax e o m in 2012, we s a e ou hi d and las hypo hesis:
“Companies a ec ed by he new hin-capi aliza ion ule educe hei le e age a io
a e he e o m mo e han hose companies ha a e no a ec ed” (Hypo hesis 3).
3 The Spanish co po a e ax se ing
The egula ion o co po a e ax in Spain is con ained in he Consolida ed Tex o
he Co po a e Income Tax Law, app o ed by Legisla i e Royal Dec ee 4/2004, o
Ma ch 5 h, and in he Co po a e Income Tax Regula ion app o ed by Royal Dec ee
1777/2004, o July 30 h. I is wo h no ing ha Spain is poli ically o ganised as a S a e
o Au onomous Regions, and wo o hese egions, namely he Basque Coun y and
Na a a, ha e special ax egimes called Economic Acco d and Economic Ag eemen ,
espec i ely, which di e o he o he egions. Unless o he wise s a ed, we will ocus
on he co po a e ax egime gene ally applied in mos o he Au onomous Regions in
Spain.
Co po a e ax is de e mined by he s a u o y ax a e imes axable income. The
Spanish legisla o educed he s a u o y ax a e om 32.5 % o iscal yea 2007
o 30 % o iscal yea s 2008–2013. On he o he hand, co po a e axable income is
de ined as he di e ence be ween pe iod e enues and pe iod expenses.5Business
expenses a e deduc ible i hey a e p ope ly eco ded and suppo ed. By con as wi h
o he coun ies, Spanish co po a e income ax ea s income esul ing om he ans e
o asse s in he same way as o he income. Acco dingly, such income is gene ally added
o (deduc ed om) egula business income o compu e he axable income.
Co po a e axable income is based on he income disclosed in he inancial s a e-
men s and accoun ing eco ds, adjus ed in acco dance wi h ax p inciples. The 2007
Spanish Gene al Accoun ing Plan app o ed by Royal Dec ee 1514/2007, o No embe
16 h di e en ia es be ween he cu en income ax expense (income) and he de e ed
income ax expense (income). The o al ax expense o income is he sum o hese wo
i ems, which should none heless be quan i ied sepa a ely. On he one hand, he cu en
income ax expense is he amoun payable by he company as a esul o income ax
5The ax pe iod is he company’s business yea . The annual ax e u n mus be decla ed and he ax paid
wi hin 25 days ollowing he 6 mon hs a e he end o he business yea .
123
366 SERIEs (2016) 7:359–391
se lemen s o a gi en yea . Con e sely, he de e ed income ax expense e lec s in
essence he ecogni ion and se lemen o de e ed ax asse s and liabili ies. A de e ed
ax asse o liabili y ep esen s he inc ease o dec ease in axes payable o e und-
able in u u e yea s as a esul o empo a y di e ences and any ne ope a ing loss o
ax c edi ca y- o wa ds ha exis a he epo ing da e. I s alue is compu ed wi h
e e ence o inancial epo ing s anda ds o book income and ax ules o axable
income. Fo ins ance, de e ed ax asse s can be c ea ed by he ax au ho i y ecogniz-
ing e enues and/o expenses ou side o he imes se ou in he accoun ing s anda ds.
In Spain “ ax e ec accoun ing”, which includes he concep o ne ax de e ed asse s,
was i s in oduced in iscal yea 2007.
As in he majo i y o de eloped economies, he Spanish co po a e ax sys em ea s
p o i s and losses asymme ically and allows ca yo e o co po a e losses. The Span-
ish ax code allows companies o ca y o wa d losses o o se axable income in
u u e yea s, bu unlike in o he coun ies such as he US, Spanish i ms canno “ca y
back” cu en losses o ecei e a ax e und o axes paid in ecen yea s.
Con en ionally, inancial expenses ha e been la gely conside ed as deduc ible om
a iscal poin o iew in Spain. The only es ic ion o his ule was hose si ua ions
wi h excess deb wi h ela ed en i ies no esiden in he Eu opean Union, wi h he
excep ion o hose s ablished in a e i o y classi ied as ax ha en. The excess deb
was compu ed as he di e ence be ween he ac ual company’s indeb edness and he
esul o applying a coe icien o h ee o equi y, excluding income o loss o he yea .
The in e es gene a ed by he excess deb was no conside ed as iscally deduc ible;
a he , i was ea ed exac ly he same as a di idend. In spi e o he p eceding ule,
co po a e axpaye s could always submi o he Spanish iscal au ho i ies a p oposal
o applying a highe a io; i i was accep ed, a di e en le e age h eshold would
be applied.6On Ma ch 30 h, 2012, he Spanish Go e nmen app o ed se e al ax
measu es wi h e ec om iscal yea s beginning om Janua y 1s , 2012.7Among
such measu es, he ax e o m in oduced new ules a ec ing he deduc ibili y o
inancial expenses. In pa icula , i de oga ed he o me Spanish hin-capi aliza ion
egime and eplaced i by a b oade ule ha s ablishes limi a ions o he deduc ibili y
o inancial expenses incu ed in excess o a gi en pe cen age o a Spanish bo owe ’s
adjus ed ope a ing p o i s ega dless o whe he o no he deb is wi h ela ed pa ies.
Unde he new ax egime, all ne inancial expenses (i.e. excess o inancial expenses
in espec o inancial income) incu ed by a Spanish co po a e axpaye in a gi en yea
ha exceed 30 % o such company’s annual ope a ing p o i s8will be non-deduc ible
o co po a e ax pu poses. No wi hs anding, he e is a loo le el o he p e ious
limi a ion, and i is ixed a 1 million eu os o ne inancial expenses. Hence, ne
inancial expenses less o equal o 1 million eu os shall be ax-deduc ible ega dless
o he le el o a company’s ope a ing p o i s in a gi en yea .
6This possibili y was no applicable o ansac ions made wi h o by pe sons o en i ies esiden in coun ies
o e i o ies legally de ined as ax ha ens.
7These measu es we e included in Royal Dec ee Law 12/2012.
8They basically co espond o ea nings be o e in e es , axes, dep ecia ion and amo iza ion (EBITDA)
wi h ce ain adjus men s. Fo mo e in o ma ion on his issue, e e o Royal Dec ee Law 12/2012.
123
SERIEs (2016) 7:359–391 373
No es: S a u o y Tax Ra e is he co po a e income ax a e es ablished by he Spanish co po a e ax
code; MTR is he ma ginal ax a e es ima ed as pe She lin (1990) and G aham (1996a); MTREBIT is
he ma ginal ax a e es ima ed using ea nings be o e in e es and axes as pe G aham e al. (1998);
ETR is axes paid on p o i s di ided by p e- ax book income, excluding ex ao dina y and
discon inued i ems; ETRb is axes acc ued on p o i s di ided by p e- ax book income, excluding
ex ao dina y and discon inued i ems.
-0.050
0.000
0.050
0.100
0.150
0.200
0.250
0.300
0.350
2007 2008 2009 2010 2011 2012 2013
S a u o y Tax Ra e
MTR
MTREBIT
ETR
ETRb
Fig. 1 Tax a iables, 2007–2013
losses and by he loss ca y- o wa d p o ision in he Spanish co po a e ax sys em. The
s anda d de ia ion o he ma ginal ax a es is 7.68 % (7.98 % o MTREBIT), implying
ha he e is mode a e a ia ion in he ma ginal ax a es o all i ms. The e o e
The pe cen age o angible asse s o e o al asse s a e ages abou 11 %. The a e age
size o he companies included in he sample is app oxima ely e802 million in e ms
o ma ke alue o asse s. Besides, he a e age p o i abili y o ou sample amoun s o
5.51 %, and he ma ke o book a io shows a 1.61 a e age alue.
We ha e calcula ed he co ela ion ma ix and, addi ionally, we ha e pe o med a
mul icollinea i y es using he Va iance In la ion Fac o (VIF). Resul s a e epo ed in
Table 9in he Appendix, and he low VIF alues sugges ha he e is no collinea i y
among he a iables conside ed.
In o de o compa e ou ma ginal ax a es a iables (i.e. MTR and MTREBIT) wi h
o he adi ional ax measu es, we ha e calcula ed ETR which is he a io o axes paid
on p o i s o p e- ax income, excluding ex ao dina y and discon inued i ems, as well
as ETRb, whose nume a o is axes acc ued on p o i s and has he same denomina o as
he p eceding a io. Figu e 1shows he ime e olu ion o he s a u o y ax a e, MTR,
MTREBIT, ETR and ETRb.
Du ing he pe iod 2007–2013, s a u o y ax a es emained mos ly s able. Con-
e sely, om 2008 onwa ds, he e is an inc easing numbe o companies wi h losses
(i.e. p e- ax book income and EBIT <0). Simul aneously, he numbe o companies
wi h MTR and MTREBIT below 10 % inc eases. O e all, he e is a downwa d end
in bo h MTR and MTREBIT.
Figu e 2depic s he dis ibu ion o simula ed ma ginal ax a es, calcula ed using
ea nings be o e in e es and axes as he base o axable income (MTREBITs) o he
sampled i ms om 2007 o 2013, and an agg ega ion ac oss all yea s in he sample.
The da a e eal subs an ial a ia ion in he ma ginal ax a e ac oss i ms and o e
123

374 SERIEs (2016) 7:359–391
No es: MTREBIT is he ma ginal ax a e es ima ed using ea nings be o e in e es and axes as pe
G aham e al. (1998).
<5%
<10%
<15%
<20%
<25%
<30%
30%
0.000
0.100
0.200
0.300
0.400
0.500
2008
2009
2010
2011
2012
2013
2008-2013
<5%
<10%
<15%
<20%
<25%
<30%
30%
Fig. 2 Ma ginal ax a e (m ebi ) dis ibu ion
ime.20 In any gi en yea , abou 2 % o he i ms ha eMTREBITs equal o he op
s a u o y ax a e, oughly 10 % ha e MTREBITs below he 5 %, while he es ha e
MTREBITs anging be ween 5 % and he highes a e (i.e. 30 %). The c oss-sec ional
a ia ion in ax a es occu s because o he ca y- o wa d ea u es o he ax code. The
ela i ely la ge pe cen age o low ax a es is due o he ac ha o e 27 % o he
obse a ions in he sample ep esen i ms wi h nega i e axable income.
6 Empi ical s a egy and esul s
As Robe s and Whi ed (2013) s a e in hei su ey pape , he mos impo an and
pe asi e issue con on ing s udies in empi ical co po a e inance is endogenei y. In
he case o es ing he impac o axes on companies’ inancing decisions, he di icul y
s ems om he ac ha any measu e o ma ginal ax a es based on ac ual balance
shee da a is no exogenous. This is due o he ma ginal ax a e’s dependence on
pas inancing decisions: he highe he le e age a io, he lowe he axable income
and he expec ed ma ginal ax a es because o he in e es deduc ibili y. This may
esul in a nega i e ela ionship be ween le e age a ios and es ima ed ma ginal ax
a es e en i high axes encou age companies o use deb as a inancing ins umen .
Consequen ly, he endogenei y o he ax s a us may p oduce a spu ious co ela ion
be ween he le e age a io and he ma ginal ax a e, making i di icul , i no i ually
impossible, o d aw causal in e ences.
As discussed in Sec . 2, we ha e o mula ed h ee empi ical hypo heses o ou
esea ch. The co ec es ing o hese hypo heses equi es he o e coming o he endo-
genei y issue, and as such we apply wo di e en me hodologies: eg ession based on
20 This igu e and he one co esponding o he o he ma ginal ax a e a iable (i.e. MTR) u ned ou o
be e y much alike.
123
SERIEs (2016) 7:359–391 375
obse ables and di e ence in di e ences app oach. Bo h o hem will allow us o es
Hypo heses 1 and 2, and he la e one will be used in o de o es Hypo hesis 3.
6.1 Reg ession app oach
Con en ionally, he e ha e been wo possible solu ions o he endogenei y p oblem
in he empi ical li e a u e (G aham e al. 1998). The i s esembles a adi ional way
o implemen ing an endogenous eg esso in econome ics, ha is, using he lagged
alue o he simula ed ma ginal ax a e as an explana o y a iable. In u n, since he
simula ed ma ginal ax a e based on he p e- ax income (and a e in e es ) al eady
inco po a es he i m’s le e age choices, a second possible solu ion o he endogenei y
p oblem uses income be o e in e es o compu e ma ginal ax a es. The e o e, his
second s a egy conside s he con empo aneous alue o he ma ginal ax a e as an
explana o y a iable bu simula ed on a be o e- inancing basis, i.e. wi h ea nings be o e
in e es . Ou empi ical esea ch will use he la e solu ion o a oid he endogenei y o
ma ginal ax a es. No wi hs anding, we will check as a obus ness es he ins umen al
a iable solu ion.
Ou eg ession model speci ies companies’ capi al s uc u e as a unc ion o ax
and con ol a iables, which we e discussed in de ail in Sec . 4. Speci ically, we use
a s a ic model o le e age because we a e no in e es ed in an economic model o he
dynamic adjus men owa ds an op imal le el o le e age. As he e is an inc emen al
basis o ou dependen a iable, we use—as pe G aham (1996a)— he changes in
possible de e minan s as explana o y a iables, excep o he a iables MTREBIT,
NDTS*RISK and RISK. The e o e, ou eg ession model equa ion is as ollows:
LEVi =β0+β1·MTREBITi +β2·NDTSi
+β3·NDTSi ∗RISK +β4·RISKi
+β5·TANGi +β6·SIZEi +β7·PROFi
+β8·TOBINSQ
i +ηi+η +εi ,(5)
whe e LEVi is a measu e o le e age o i m iin yea ;MTREBIT ep esen s he ma -
ginal ax a e es ima ed wi h ea nings be o e in e es and axes; NDTS is he non-deb
ax shield a iable; RISK is he p obabili y o bank up cy a iable; TANG is he angi-
bili y a iable; SIZE deno es he na u al loga i hm o o al asse s; PROF is he e u n on
asse s a io; TOBIN’S Q is he ma ke o book asse s a io; ηi ep esen s ime-in a ian
unobse able i m-speci ic e ec s (e.g., managemen pe o mance, epu a ion, e c.)21;
η ep esen s ime-speci ic e ec s which a e common o all i ms and may change o e
ime (e.g., mac oeconomic condi ions); and εi is he dis u bance e m.
Table 2shows he es ima ion esul s o ou eg ession model o bo h le e age
measu es LEV1and LEV2.22
21 Lemmon e al. (2008) show ha co po a e capi al s uc u es a e cha ac e ized by an impo an i m
speci ic e ec .
22 To e i y he cha ac e — ixed o andom—o he unobse able indi idual e ec s, we use Hausman es .
This es ejec s he null hypo hesis ega ding he absence o co ela ion be ween he unobse able e ec s
and he explana o y a iables, which leads o he selec ion o he ixed-e ec es ima o .
123
376 SERIEs (2016) 7:359–391
Table 2 Es ima ion esul s o
he capi al s uc u e model om
Eq. (5)
Fixed–e ec eg ession
coe icien s es ima ed om
Eq. (5) wi h obus s anda d
e o s in b acke s. Table 7in he
Appendix p o ides de ini ions o
all he a iables. Supe sc ip
as e isks indica e s a is ical
signi icance a 0.01(***),
0.05(**) and 0.10(*) le els
Explana o y a iables LEV1LEV2
MTREBIT 2.188** (0.938) 1.078 (0.975)
NDTS 1.265 (1.601) 1.536 (1.724)
NDTS*RISK −0.395*** (0.073) −0.122 (0.091)
RISK −0.001* (0.000) −0.001* (0.000)
ΔTANG 0.244* (0.129) 0.239* (0.136)
ΔSIZE 0.281*** (0.077) 0.219*** (0.076)
ΔPROF 0.298* (0.1704) 0.296 (0.2475)
ΔTOBINSQ −0.159*** (0.045) −0.083*** (0.017)
Obse a ions 434 434
R-Squa ed Wi hin 0.200 0.121
In he case o he eg ession o LEV1, wi h he excep ion o NDTS all pa ame-
e es ima es ha e he expec ed signs and a e s a is ically signi ican . To add ess he
economic signi icance o he es ima ed coe icien o 2.188 on MTREBIT epo ed in
Table 2, conside he impac on le e age policy esul ing om a mo emen om a e -
age MTREBIT o 0.182 (see Table 1) o he maximum o he sample pe iod (0.300).
All else equal, a hypo he ical i m wi h a ma ginal ax a e o 30.00 % would inc ease
he use o ne deb (i.e. he change in i s deb a io) by 25.86 % poin s, compa ed
o an iden ical i m wi h a ma ginal ax a e o 18.20 %. I we ge he s anda dized
eg ession coe icien s, MTREBIT appea s o be he s onges p edic o in he model
and a one s anda d de ia ion inc ease in MTREBIT leads o a 0.720 s anda d de ia ion
inc ease in p edic ed le e age change, wi h he o he a iables held cons an .
When LEV2is used as dependen a iable, he mos impo an di e ence om
he p e ious esul s is ha MTREBIT is no longe s a is ically signi ican . The e o e,
we pa ially con i m ou Hypo hesis 1 whe eby deb policy and ma ginal ax a es
a e posi i ely ela ed. Mo eo e , he esul s in he case o dependen a iable LEV1
suppo ou Hypo hesis 2 ega ding non-deb ax shields. Con ol a iables show he
ypical and expec ed coe icien signs.
6.2 Di e ence in di e ences app oach
An al e na i e app oach o o e come he endogenei y p oblem o he ax s a us in
capi al s uc u e esea ch, is o look o exogenous changes in ax laws, and hen analyse
how companies eac o hose changes by adjus ing hei deb a ios. In pa icula , we
s udy he impac o he 2012 e o m o he Spanish co po a e ax income. Acco dingly,
we use a di e ence in di e ences app oach (DiD)23 and di ide ou i ms’ sample in o
a ea men g oup and a con ol g oup. We design he ea men g oup by iden i ying
23 We e e o Robe s and Whi ed (2013) o an in dep h e iew o econome ic echniques aimed a
add essing endogenei y p oblems, including echniques such as DiD ha ely on a clea sou ce o exogenous
a ia ion.
123
SERIEs (2016) 7:359–391 377
hose companies ha a e likely o be a ec ed by he new hin-capi aliza ion ule. Fo
ha eason, he classi ica ion c i e ia ela es o he ollowing:
•A company is included in he ea men g oup i , in 2012, i s ne inancial expenses
exceed 30 % o EBITDA, conside ing ne in e es expense su passes 1 million
eu os, i is conside ed as a iscal g oup, and i s ax esidence is loca ed in any
Spanish Au onomous Region excep he Basque Coun y o Na a a.24
•A company is assigned o he con ol g oup i i does no mee any o he p e ious
c i e ia. Fo ins ance, a company whose ax esidence is loca ed in he Basque
Coun y o Na a e will belong o his g oup albei i s inancial expenses le el.
Acco ding o he p e ious ea men and con ol g oups de ini ions, 25 companies (175
obse a ions) we e classi ied as ea ed and he o he 63 companies (441 obse a ions)
we e included in he con ol g oup. The e o e, app oxima ely 28 % o he companies
in ou sample we e po en ially a ec ed by he new hin-capi aliza ion ule. The main
cha ac e is ics o he companies o bo h ea men and con ol g oups a e epo ed in
Table 10 in he Appendix. As expec ed, he ea men g oup shows a 13 % poin s la ge
a e age deb le el han he con ol g oup. I is likely ha he ea men g oup has a
highe absolu e alue o le e age han he con ol g oup. T ea men g oup companies
mus ha e co espondingly high in e es expenses o ensu e ha he ax deduc ibili y
es ic ion applies, while companies in he con ol g oup will no incu in such high
in e es allowances. Addi ionally, ea ed companies ha e a lowe a e age angibili y,
a lowe a e age p o i abili y and a lowe ma ke - o-book a io compa ed wi h con ol
g oup i ms.
Unde he DiD app oach, also known as “in e ac ion among dummy a iables”, we
cons uc wo dummy a iables: he i s one is called TREATED which is equal o 1
i he company belongs o he ea men g oup and ze o o he wise, and con ols o
pe manen di e ences be ween he ea men and con ol g oups; he second one is
called TAX_REFORM which is equal o 1 o iscal yea s 2012 and 2013 (i.e. a e he
implemen a ion o he co po a e ax e o m) and 0 o all he p eceding iscal yea s,
and i con ols o ends common o bo h ea men and con ol g oups. The esul ing
DiD model wi h he inclusion o he wo new dummy a iables is:
LEVi =β0+β1·TREATEDi +β2·TAX_REFORMi
+β3·TREATEDi ·TAX_REFORMi
m

j=1
βj
·TAX VARIABLESji +
n

k=1
βk
·CONTROL VARIABLESki +ηi+εi (6)
24 The special ax egimes in hese Au onomous Regions do no apply he same hin-capi aliza ion ule
han in he es o he Spanish Au onomous Regions.
123
378 SERIEs (2016) 7:359–391
Whe e he dependen a iable, and ax and con ol a iables ha e been iden i-
ied be o e in Eq. (5); ηiis he ixed e ec o company i; and εi is he esidual
e m. We ha e added company- ixed e ec s in o de o cap u e all ime-cons an
e ec s ha migh be esponsible o a company o be a high- o low-le e aged i m
in gene al; he e o e, he TREATED dummy a iable is no iden i ied in he es i-
ma ion o Eq. (6) The in e ac ion e m TREATED*TAX_REFORM equals 1 when
company i belongs o he ea men g oup and yea is 2012 o 2013; con e sely,
i is equal o ze o o he wise. The obse able a iables in Eq. (6) will ha e wo
po en ial ou comes co esponding o he ou comes unde he ea men and he
con ol g oups. The ea men e ec is he di e ence be ween he wo po en ial
ou comes. In pa icula , he β3coe icien gi es he DiD es ima e o he ea -
men e ec , namely he change in he deb a io o he ea men g oup and ha
o he con ol g oup be o e and a e he ax e o m came in o e ec . We expec
his coe icien o be nega i e, which indica es ha he deb a io o he ea ed
companies declines compa ed o hei coun e pa s in he con ol g oup a e he
e o m.
While i is likely o see a sha p change in beha io among he ea men g oup
ollowing he exogenous shock ha is he limi a ion o he ax deduc ibili y o inan-
cial expenses, i is no expec ed o see such a change in he con ol g oup ha
is no a ec ed by ha shock. As Robe s and Whi ed (2013) poin ou , he key
assump ion o consis ency o he DiD es ima o is wha is called he ze o co e-
la ion assump ion. In economic e ms, his condi ion implies ha , in he absence o
he ea men , he e olu ion in he a iable o in e es (in ou case, le e age) would
ha e been iden ical o bo h he ea men and con ol g oups. This assump ion is
o en e e ed o as he pa allel ends assump ion because i equi es any ends in
he dependen a iable o he wo g oups o companies p io o he ea men o be
he same (Ang is and Pischke 2009). While le el di e ences o ou comes be ween
he ea men and con ol g oups as well as common ends o ou comes o bo h
ea ed and con ol companies a e easily handled by he DiD es ima o , di e en ial
ends among he wo g oups will gene ally lead o inconclusi e o e oneous in e -
ences.
The same as wi h all endogenei y p oblems, we canno o mally es he pa allel
ends assump ion. E en hough simila p e- ea men ends a e eassu ing, o exam-
ple pe o ming a mean-di e ence es , hey a e no a su icien condi ion o ensu e
ha he endogenei y p oblem has been amended. No wi hs anding, and as we ha e
mo e han 1-yea p e- e o m da a, we can compa e he ends in he ou come a iable
du ing he ime ame p io o 2012 o bo h ea men g oup companies and hei non-
ea ed coun e pa s. Figu e 3illus a es he ime e olu ion o he deb le el scaled by
o al asse s o bo h ea men (i.e. companies a ec ed by he ax e o m) and con ol
(i.e. companies no a ec ed by he ax e o m) g oups.
The mean deb le el o he ea men g oup companies inc eases sligh ly h ough-
ou he whole pe iod. O e all, an inc ease o app oxima ely 2.89 % om 29.78 %
in 2008 o 32.67 % in 2013 can be obse ed. Con e sely, no a ec ed o con ol
g oup companies inc ease hei mean deb le el by a 2.84 % om 19.20 % in 2008
o 22.04 % in 2013. On a close examina ion, he mean le e age eaches a maxi-
mum o 47.11 % (23.82 %) o ea ed (non- ea ed) companies in 2012. In e ms o
123

SERIEs (2016) 7:359–391 379
No es: he ea men g oup is de ined as companies a ec ed by he ax e o m, while he
con ol g oup includes companies no a ec ed by he e o m. Di e ence is he ea men
ou come minus he con ol ou come.
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
0.50
2008 2009 2010 2011 2012 2013
T ea men
Con ol
Di e ence
Fig. 3 Deb le el ime e olu ion o ea ed s. con ol companies
he di ec ion o he pos - e o m esponse, i is expec ed ha companies in he ea -
men g oup educe hei le e age posi ion mo e s ongly han hose coun e pa s in
he con ol g oup. As Fig. 3illus a es, he e is a signi ican dec ease in he mean
deb le el o 14.44 % o he ea men g oup om 2012 o 2013, while his educ-
ion was only o 1.78 % o he con ol g oup. F om a simple desc ip i e pe spec i e,
Fig. 3shows ha on a e age companies a ec ed by he 2012 co po a e ax e o m
educe hei deb a io a e he e o m o a much la ge ex en han hei no a ec ed
coun e pa s. Nex , we o mally es whe he his di e ence is s a is ically signi i-
can .
Table 3depic s he es ima ion esul s o ou di e ence in di e ence eg ession
model coming om Eq. 6.AsAn (2012), Kahle and S ulz (2013), and D eßle and
Scheue ing (2015), we employ a ixed e ec s DiD app oach as ixed e ec s eg es-
sion con ols o companies’ unobse ed and ime-in a ian cha ac e is ics ha may
in luence he ou come a iable.25
Columns (1) and (2) in Table 3show he es ima es om he DiD eg ession model
wi hou and wi h co a ia es, espec i ely. The in e ac ion e m, TREATED*TAX_
REFORM, cap u es o wha ex en companies in he ea men g oup adjus hei le e -
age when hey a e a ec ed by he 2012 ax e o m. The coe icien o his in e ac ion
25 Hausman es ejec s he null hypo hesis ega ding he absence o co ela ion be ween he unobse able
e ec s and he explana o y a iables, which leads o he selec ion o he ixed-e ec es ima o .
123
380 SERIEs (2016) 7:359–391
Table 3 Reg ession es ima ion esul s unde he DiD app oach
Explana o y a iables (1) (2) (3) (4)
TAX_REFORM −0.008 (0.021) 0.038 (0.028) −0.047* (0.028) −0.008 (0.036)
TREATED*TAX_
REFORM
−0.178** (0.069) −0.124** (0.054) 0.055 (0.062) 0.072 (0.069)
MTREBIT 2.216** (1.043) 1.661 (1.076)
NDTS 1.881 (1.601) 0.703 (2.640)
NDTS*RISK −0.398*** (0.113) 0.225** (0.0922)
RISK −0.001** (0.000) −0.000** (0.000)
ΔTANG 0.231* (0.125) 0.138 (0.148)
ΔSIZE 0.268*** (0.076) 0.225*** (0.069)
ΔPROF 0.273* (0.178) −0.098 (0.150)
ΔTOBINSQ −0.153*** (0.045) −0.076*** (0.025)
Obse a ions 528 434 352 258
R-Squa ed Wi hin 0.043 0.214 0.011 0.129
Columns (1) and (2) include ixed-e ec eg ession coe icien s es ima ed om Eq. (6) wi hou and wi h
co a ia es, espec i ely. Reg essions in columns (3) and (4) es ic he sample o yea s 2007–2011 and use
a ake ax policy in 2011 as a placebo. The dependen a iable is deb le el scaled by o al asse s in all
eg essions. TAX_REFORM is a dummy a iable ha akes he alue o 1 o da a a e he ax e o m, and
TREATED is a dummy a iable ha akes he alue o 1 i he company is a ec ed by he 2012 co po a e
ax e o m. Table 7in he Appendix p o ides de ini ions o he es o he a iables. Supe sc ip as e isks
indica e s a is ical signi icance a 0.01(***), 0.05(**) and 0.10(*) le els. Robus s anda d e o s a e in
b acke s
e m has u ned ou o be nega i e and s a is ically signi ican a he 5 % le el in
bo h eg essions. This nega i e sign implies ha hose companies a ec ed by he new
hin-capi aliza ion ule educe hei indeb edness s onge han hose coun e pa s no
a ec ed. Speci ically, and wi hou including co a ia es, he change o he p e- o pos -
e o m deb a io is 18 pe cen age poin s lowe o he ea men g oup compa ed o
he con ol g oup. A e con olling o o he ac o s, he second column o Table 3
depic s ha he a e age deb a io in he ea men g oup declines mo e by 12 pe -
cen age poin s ela i e o he con ol g oup. The e o e, ou Hypo hesis 3 is con i med
which can be in e p e ed as he e does seem o exis a ax e o m e ec .
As a as he es o es ima es is conce ned, he signs and signi icance o he coe -
icien s emain quali a i e and quan i a i ely alike o hose encoun e ed in Table 2.
Consequen ly, Hypo heses 1 and 2 a e again con i med.
Fu he mo e, we ca y ou a alsi ica ion es in o de o alida e whe he he e was
a pa allel end o he dependen a iable be ween ea men and con ol g oups in he
p e- e o m pe iod (i.e. be o e iscal yea 2012). In his way, we examine whe he po en-
ial ea ed and un ea ed companies had a di e en de elopmen o hei deb a io in a
placebo e o m. Speci ically, we es ic ou sample ime ho izon o yea s 2007–2011,
and es ablish as a placebo a ake ax policy in 2011. Columns (3) and (4) in Table 3
epo he esul s o his es wi hou and wi h co a ia es, espec i ely. As expec ed,
he DiD es ima e o he ea men e ec is nei he s a is ically and no economically
signi ican ; in o he wo ds, he di e ence in le e age a ios be ween ea men and
123
SERIEs (2016) 7:359–391 381
Table 4 Es ima ion esul s o
he capi al s uc u e model om
Eq. (5) wi h lagged ma ginal ax
a e (m )
Fixed–e ec eg ession
coe icien s es ima ed om
Eq. (5) wi h obus s anda d
e o s in b acke s. Table 7in he
Appendix p o ides de ini ions o
he a iables. Supe sc ip
as e isks indica e s a is ical
signi icance a 0.01(***),
0.05(**) and 0.10(*) le els
Explana o y a iables LEV1LEV2
LAGGED_MTR 1.275* (0.748) 0.299 (0.681)
NDTS 1.654 (2.015) 2.742 (2.121)
NDTS*RISK −0.395*** (0.099) −0.125 (0.089)
RISK −0.001* (0.000) −0.001* (0.000)
ΔTANG 0.319** (0.156) 0.351** (0.143)
ΔSIZE 0.259*** (0.080) 0.174** (0.077)
ΔPROF 0.423** (0.172) 0.430 (0.273)
ΔTOBINSQ −0.155*** (0.047) −0.076*** (0.016)
Obse a ions 370 370
R-Squa ed Wi hin 0.203 0.129
con ol g oups is insigni ican o e e y yea conside ed p io o he 2012 ax e o m.
This implies ha he analysed companies do no di e in he inancial beha iou and
all he companies eac in he same way. This inding cons i u es e idence ha he e
is a pa allel end be ween he wo g oups in he yea s be o e he ax e o m.
7 Robus ness o esul s
In o de o assess he obus ness o ou p e ious empi ical e idence, we pe o m h ee
di e en es s.
Fi s ly, in he eg ession app oach ha we ha e applied in he p eceding Sec ion, a
p e-in e es income measu e o he ma ginal ax a e was used in o de o con on he
endogenei y p oblem. This solu ion e ades he e ec o inancing decisions, and hus
alle ia es he non-exogenei y ax s a us o companies. Ne e heless, he e s ill could
exis biases in his measu e due o po en ial ea nings manipula ion om manage s
in o de o in luence he ma ginal ax a e and hence, he company’s deb policy.
Consequen ly, as a obus ness check we ha e ins umen ed he le e age dependen
a iable wi h i s lag. Table 4p esen s he esul s o his new es ima ion and co obo a e
ou p e ious indings.
Secondly, he ela ionship be ween ma ginal ax a es and deb policy could be in lu-
enced by he le e age s a us o he companies. Speci ically, he posi i e e ec o axa-
ion on le e age should be s onge o less le e ed i ms, which p esumably ha e mo e
incen i e o inc ease hei deb . In o de o es his issue we calcula e a dummy a iable
(DUMMY_LEV) ha equals 1 i he deb a io is below he median and 0 o he wise. Fu -
he mo e, we in oduce in he eg ession MTREBIT*DUMMY_LEV whichisanin e -
ac ion e m esul ing om he mul iplica ion o he dummy a iable DUMMY_LEV
and he MTREBIT a iable. Table 5con ains he es ima ion esul s and shows ha he
coe icien associa ed wi h he in e ac ion e m is only s a is ically signi ican o he
dependen a iable LEV1. I s posi i e sign indica es a mo e in ense posi i e e ec o
axes on deb o i ms wi h a less le e ed s a us. In he sample o mo e le e ed i ms,
he e ec o MTREBIT on deb policy is equal o 2.4, while among less le e ed i ms
he impac is 1.1 highe , al hough his di e ence is only ma ginally signi ican .
123
382 SERIEs (2016) 7:359–391
Table 5 Es ima ion esul s o
he capi al s uc u e model om
Eq. (5) con olling o le e age
Fixed-e ec eg ession
coe icien s es ima ed om
Eq. (5) wi h obus s anda d
e o s in b acke s. Table 7in he
Appendix p o ides de ini ions o
he a iables. Supe sc ip
as e isks indica e s a is ical
signi icance a 0.01(***),
0.05(**) and 0.10(*) le els
Explana o y Va iables LEV1LEV2
MTREBIT 2.383*** (0.787) 1.454 (0.964)
NDTS 1.785 (1.226) 2.103 (1.493)
NDTS*RISK −0.402*** (0.067) −0.138* (0.083)
RISK −0.001* (0.000) −0.001** (0.000)
ΔTANG 0.167 (0.144) 0.162 (0.147)
ΔSIZE 0.281*** (0.071) 0.221*** (0.075)
ΔPROF 0.267* (0.140) 0.270 (0.217)
ΔTOBINSQ −0.133*** (0.032) −0.066*** (0.018)
DUMMY_LEV −0.480*** (0.162) −0.230*** (0.081)
MTREBIT*DUMMY_LEV 1.103* (0.627) 0.096 (0.434)
Obse a ions 434 434
R-Squa ed Wi hin 0.307 0.187
Table 6 Es ima ion esul s o
he capi al s uc u e model om
Eq. (5) con olling o s a u o y
ax a e
Fixed-e ec eg ession
coe icien s es ima ed om
Eq. (5) wi h obus s anda d
e o s in b acke s. Table 7in he
Appendix p o ides de ini ions o
he a iables. Supe sc ip
as e isks indica e s a is ical
signi icance a 0.01(***),
0.05(**) and 0.10(*) le els
Explana o y a iables LEV1LEV2
TAX DIFFERENCE −1.192 (0.834) −0.096 (0.735)
NDTS 1.581 (2.037) 2.768 (2.114)
NDTS*RISK −0.387** (0.096) −0.120 (0.089)
RISK −0.000* (0.000) −0.001* (0.000)
ΔTANG 0.319** (0.156) 0.344** (0.141)
ΔSIZE 0.257*** (0.079) 0.175*** (0.077)
ΔPROF 0.428** (0.172) 0.434 (0.272)
ΔTOBINSQ −0.158*** (0.046) −0.078*** (0.164)
Obse a ions 370 370
R-Squa ed Wi hin 0.200 0.129
Thi dly, i manage s make decisions based on hei i m’s cu en s a u o y ax
s a us, highe deb igu es would be obse ed o companies wi h g ea e di e ences
be ween hei s a u o y ax a e and ma ginal ax a e. The e o e, we cons uc a TAX
DIFFERENCE a iable as pe G aham (1996a) and Sinha and Bansal (2013), which
is he esul o he s a u o y ax a e minus he ma ginal ax a e. Acco ding o his
a ionale, we expec his ax di e ence a iable o be posi i ely ela ed o deb usage
i companies make ax-based le e age decisions based on hei s a u o y ax a es.
Con e sely, he coe icien on his a iable will be ze o o non-signi ican i i ms
make ax-based le e age decisions based exclusi ely on simula ed ma ginal ax a es.
We ha e used he lagged alues o his a iable, and we ha e con olled o he ma ginal
ax a e in he eg ession hough i is d opped due o collinea i y. Table 6 epo s he
es ima ion esul s and shows companies make deb decisions based on hei ma ginal
ax a e and no he s a u o y ax a e.
123
SERIEs (2016) 7:359–391 389
Table 10 Cha ac e is ics o ea men g oup e sus con ol g oup
Va iable T ea men g oup Con ol g oup Mean di e ence es
Deb o asse s ma ke alue 0.328 0.200 0.128 ∗∗∗
MTREBIT 0.185 0.181 0.004
NDTS −0.007 0.007 −0.014
NDTS*RISK −1.429 −0.078 −1.351 ∗∗
RISK 7.556 3.062 4.494
TANG 0.064 0.126 −0.062 ∗∗∗
SIZE 20.374 20.553 −0.179
PROF 0.019 0.069 −0.050 ∗∗∗
TOBIN’S Q 1.298 1.734 −0.436 ∗∗∗
This able compa es he means o key a iables be ween companies assigned o he ea men g oup and
companies included in he con ol g oup. The o al sample o 88 companies (616 obse a ions) is dis ibu ed
be ween 25 companies (175 obse a ions) o he ea men g oup and 63 companies (441 obse a ions) o
he con ol g oup. NDTS and NDTS*RISK ha e been escaled by a ac o o 100. Table 7p o ides de ini ions
o he a iables. The las column on he igh hand side show he esul o a es i he mean alues be ween
he ea men g oup and he con ol g oup a e s a is ically equal. Supe sc ip as e isks indica e s a is ical
signi icance a 0.01(***), 0.05(**) and 0.10(*) le els
Re e ences
Albe e ns S, Su e h C (2015) The e ec o axes on co po a e inancing decisions – E idence om he
Ge man in e es ba ie . Wo king Pape , No. 8, Cen e o Tax and Accoun ing Resea ch
Al man E (1968) Financial a ios, disc iminan analysis, and he p edic ion o co po a e bank up cy. J
Finance 23:589–609
Alwo h J, A achi G (2001) The e ec o axes on co po a e inancing decisions: e idence om a panel o
I alian i ms. In Tax Public Finance 8:353–376
An Z (2012) Taxa ion and capi al s uc u e: empi ical e idence om a quasi-expe imen in China. J Co p
Finance 18:683–689
Ang is JD, Pischke JS (2009) Mos ly ha mless econome ics: an empi icis ’s companion. P ince on Uni-
e si y P ess, P ince on
Ba holdy J, Ma eus C (2011) Deb and axes o p i a e i ms. In Re Financ Anal 20:177–189
Blouin J, Co e JE, Guay W (2010) Ha e he ax bene i s o deb been o e es ima ed? J Financ Econ
98:195–213
Blouin J, Huizinga H, Lae en L, Nicodème G (2014) Thin capi aliza ion ules and mul ina ional i m capi al
s uc u e. Wo king Pape , WP/14/12, In e na ional Mone a y Fund
B adley M, Ja ell G, Kim E (1984) On he exis ence o an op imal capi al s uc u e: heo y and e idence.
J Finance 39:857–878
Byoun S (2008) How and when do i ms adjus hei capi al s uc u es owa d a ge s. J Finance 63(6):3069–
3096
Con os G (2005) An essay on he e ec s o axa ion on he co po a e inancial policy. In: 98 h Annual
Con e ence on Taxa ion, Na ional Tax Associa ion, Miami, Flo ida, USA
De Jong A, Rezaul K, Thuy TN (2008) Capi al s uc u e a ound he wo ld: he oles o i m- and coun y-
speci ic de e minan s. J Bank Finance 32:1954–1969
DeAngelo H, Masulis R (1980) Op imal capi al s uc u e unde co po a e and pe sonal axa ion. J Financ
Econ 8(1):3–29
Doidge C, Dyck A (2015) Taxes and co po a e policies: e idence om a quasi na u al expe imen . J Finance
70(1):45–89
D eßle D, Scheue ing U (2015) Empi ical e alua ion o in e es ba ie e ec s. Discussion Pape , No.
12-046, ZEW
Faccio M, Xu J (2015) Taxes and capi al s uc u e. J Financ Quan Anal 50(3):277–300
123

390 SERIEs (2016) 7:359–391
Fama EF, F ench KR (2012) Capi al s uc u e choices. C i ical Finance. Re iew 1(1):59–101
Feld LP, Heckemeye JH, O e esch M (2013) Capi al s uc u e choice and company axa ion: a me a-s udy.
J Bank Finance 37:2850–2866
F ank MZ, Goyal VK (2009) Capi al s uc u e decisions: which ac o s a e eliably impo an ? Financ
Manag 38:1–37
Go don RH, Lee Y (2001) Do axes a ec co po a e deb policy? E idence om U.S. co po a e ax e u n
da a. J Public Econ 82:195–224
G aham JR (1996a) Deb and he ma ginal ax a e. J Financ Econ 41:41–73
G aham JR (1996b) P oxies o he ma ginal ax a e. J Financ Econ 42:187–221
G aham JR (2000) How big a e he ax bene i s o deb ? J Finance 55(5):1901–1941
G aham JR (2003) Taxes and co po a e inance: a e iew. Re Financ S ud 16:1075–1129
G aham J R (2008) Taxes and co po a e inance. In: Eckbo B E (Ed) Handbook o Co po a e Finance, ol
2, Chap e 11. Empi ical Co po a e Finance. Else ie , No h-Holland, pp 59–133
G aham J R (2013) Do axes a ec co po a e decisions? A e iew. In: Cons an inides G M, Ha is M
and S ulz R M (Eds) Handbook o he Economics o Finance, ol 2, Pa A, Chap e 3. Else ie ,
No h-Holland, pp 123–210
G aham JR, Mills L (2008) Using ax e u n da a o simula e co po a e ma ginal ax a es. J Accoun Econ
46(2–3):366–388
G aham JR, Lemmon ML, Schallheim JS (1998) Deb , leases, axes, and he endogenei y o co po a e ax
s a us. J Finance 53(1):131–162
G opp R E (1997) The e ec o expec ed e ec i e co po a e ax a es on inc emen al inancing decisions.
Wo king Pape , No 46, In e na ional Mone a y Fund
G opp RE (2002) Local axes and capi al s uc u e choice. In Tax Public Finance 9(1):51–71
Ha mann-Wendels T, S ein I, S ö e A (2012) Tax incen i es and capi al s uc u e choice: e idence om
Ge many. Discussion Pape , No 18, Deu sche Bundesbank
Heide F, Ljungq is A (2015) As ce ain as deb and axes: es ima ing he ax sensi i i y o le e age om
S a e ax changes. J Financ Econ 118(3):684–712
Kahle KM, S ulz RM (2013) Access o capi al, in es men and he inancial c isis. J Financ Econ 110:280–
299
Ko JK, Yoon S (2011) Tax bene i s o deb and deb inancing in Ko ea. Asia Pac J Financ S ud 40:824–855
Kunieda S, Takaha a J, Yada H (2011) Japanese i ms’ deb policy and ax policy. Discussion Pape Se ies
No 2011-11, Hi o subashi Uni e si y, Tokyo
Lemmon ML, Robe s MR, Zende JF (2008) Back o he beginning: pe sis ence and he c oss-sec ion o
co po a e capi al s uc u es. J Finance 63(4):1575–1608
López-G acia J, Sogo b-Mi a F (2014) Sensi i i y o ex e nal esou ces o cash low unde inancial con-
s ain s. In Bus Re 23:920–930
Mackie-Mason JK (1990) Do axes a ec co po a e inancing decisions? J Finance 45(5):1471–1493
Modigliani F, Mille MH (1963) Co po a e income axes and he cos o capi al: a co ec ion. Am Econ Re
53(2):433–443
Mooij R A (2011) The ax elas ici y o co po a e deb : a syn hesis o size and a ia ions. Wo king Pape ,
WP/11/95, In e na ional Mone a y Fund
Mye s SC (1984) The capi al s uc u e puzzle. J Finance 39:575–592
Panie F, Pé ez-González F, Villanue a P (2013) Capi al s uc u e and axes: wha happens when you (also)
subsidize equi y? Unpublished Manusc ip , S an o d Uni e si y
Plesko GA (2003) An e alua ion o al e na i e measu es o co po a e ax a es. J Accoun Econ 35:201–226
Robe s M R, Whi ed T M (2013) Endogenei y in empi ical co po a e inance. In: Cons an inides G M,
Ha is M and S ulz R M (Eds) Handbook o he Economics o Finance, ol 2, Pa A, Chap e 7.
Else ie , No h-Holland, pp 493–572
She lin T (1990) Es ima ing co po a e ma ginal ax a es wi h asymme ic ax ea men o gains and losses.
J Am Tax Assoc 12:51–67
Shum PM (1996) Taxes and co po a e deb policy in Canada: an empi ical in es iga ion. Can J Econ
29:556–572
Sinha P, Bansal V (2012) Algo i hm o calcula ing co po a e ma ginal ax a e using Mon e Ca lo simula-
ion. MPRA Pape No 40811, Uni e si y Lib a y o Munich, Ge many
Sinha P, Bansal V (2013) Capi al s uc u e puzzle: he in e ela ionship be ween le e age, axes and o he
mic o economic ac o s. MPRA Pape No 49878, Uni e si y Lib a y o Munich, Ge many
123
SERIEs (2016) 7:359–391 391
Sogo b-Mi a F (2005) How SME uniqueness a ec s capi al s uc u e: e idence om a 1994–1998 Spanish
da a panel. Small Bus Econ 25:447–457
S ebulae IA, Whi ed TM (2012) Dynamic models and s uc u al es ima ion in co po a e inance. Found
T ends Finance 6:1–163
Ti man S, Wessels R (1988) The de e minan s o capi al s uc u e choice. J Finance 43:1–19
T eze an R (1992) Deb inancing and ax s a us. J Finance 47:1557–1568
Welch I (2011) Two common p oblems in capi al s uc u e esea ch: he inancial-deb - o-asse a io and
issuing ac i i y e sus le e age changes. In Re Finance 11(1):1–17
123