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Taxes and Corporate Debt Policy in Canada: An Empirical Investigation

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  • Pauline M. Shum

Abstract

This paper explores the implications of asymmetric corporate taxes for firms' debt policy. The focus is on the effects of two dynamic tax provisions, loss carry-forward and loss carry-back, on net debt issues. An effective tax variable is first estimated using a Tobit framework, accounting for the fact that firms' losses for tax purposes are censored. This effective tax variable and other explanatory factors are employed to explain net debt issues. Heteroskedasticity caused by the 'firm size effect' is also corrected. Using a panel of 128 firms between 1979 and 1989, this paper finds that corporate taxes have significant effects on firms' debt policy.

Suggested Citation

  • Pauline M. Shum, 1996. "Taxes and Corporate Debt Policy in Canada: An Empirical Investigation," Canadian Journal of Economics, Canadian Economics Association, vol. 29(3), pages 556-572, August.
    • Handle: RePEc:cje:issued:v:29:y:1996:i:3:p:556-72
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    Cited by:

    1. Ebenezer Bugri Anarfo, 2015. "Determinants of Capital Structure of Banks: Evidence from Sub-Sahara Africa," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(4), pages 624-640, April.
    2. Sinha, Pankaj & Bansal, Vishakha, 2013. "Capital structure puzzle: the interrelationship between leverage, taxes and other micro economic factors," MPRA Paper 49878, University Library of Munich, Germany, revised 17 Sep 2013.
    3. Nils aus dem Moore, 2014. "Taxes and Corporate Financing Decisions – Evidence from the Belgian ACE Reform," Ruhr Economic Papers 0533, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    4. aus dem Moore, Nils, 2014. "Taxes and Corporate Financing Decisions – Evidence from the Belgian ACE Reform," Ruhr Economic Papers 533, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    5. Bartholdy, Jan & Mateus, Cesário, 2006. "Debt and Taxes: Evidence from bank-financed unlisted firms," Finance Research Group Working Papers F-2006-02, University of Aarhus, Aarhus School of Business, Department of Business Studies.
    6. repec:zbw:rwirep:0533 is not listed on IDEAS
    7. Zyblock, Miles, 1997. "L'effet de levier financier des entreprises : une comparaison entre le Canada et les E.-U., 1961-1996," Direction des études analytiques : documents de recherche 1997111f, Statistics Canada, Direction des études analytiques.
    8. José A. Clemente-Almendros & Francisco Sogorb-Mira, 2016. "The effect of taxes on the debt policy of spanish listed companies," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 7(3), pages 359-391, August.
    9. Faig, Miquel & Shum, Pauline, 1999. "Irreversible investment and endogenous financing: An evaluation of the corporate tax effects," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 143-171, February.
    10. Graham, John R., 1999. "Do personal taxes affect corporate financing decisions?," Journal of Public Economics, Elsevier, vol. 73(2), pages 147-185, August.
    11. Zyblock, Miles, 1997. "Corporate Financial Leverage: A Canada - U.S. Comparison, 1961-1996," Analytical Studies Branch Research Paper Series 1997111e, Statistics Canada, Analytical Studies Branch.
    12. Julian Alworth & Giampaolo Arachi, 2001. "The Effect of Taxes on Corporate Financing Decisions: Evidence from a Panel of Italian Firms," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(4), pages 353-376, August.
    13. Michele Bernasconi & Anna Marenzi & Laura Pagani, 2005. "Corporate Financing Decisions and Non-Debt Tax Shields: Evidence from Italian Experiences in the 1990s," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(6), pages 741-773, November.
    14. Amin Mawani, 2007. "Simulating Firm-Specific Corporate Marginal Tax Rates in a Canadian Context," Multinational Finance Journal, Multinational Finance Journal, vol. 11(1-2), pages 77-96, March-Jun.

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