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Crowding-out or shying-away: impact of corporate income tax on capital structure choice of firms in Pakistan

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  • Nadeem Ahmed Sheikh
  • Muhammad Azeem Qureshi

Abstract

This article aims to investigate whether corporate income taxes affect the capital structure of nonfinancial firms listed on Karachi Stock Exchange Pakistan during 1972-2010. Empirical results suggest that taxes are positively related to total debt ratio and short-term debt ratio, whereas they are negatively related to long-term debt ratio. The negative relationship between taxes and long-term debt ratio appears illogical considering the tax advantage of debt in the presence of the corporate income tax. However, the observed crowding-out of corporate debt financing due to the presence of nondebt tax shields provides some logic on the demand side. While on the supply side the banks shy away from long-term debt in peculiar socioeconomic realities of Pakistan. The mixed relationships of corporate income tax with different measures of capital structure partially confirm the prophecy of trade-off theory in Pakistan. In addition, we find that other firm-specific variables which appear to significantly influence the capital structure choice of firms are profitability, collateral value of assets and firm size.

Suggested Citation

  • Nadeem Ahmed Sheikh & Muhammad Azeem Qureshi, 2014. "Crowding-out or shying-away: impact of corporate income tax on capital structure choice of firms in Pakistan," Applied Financial Economics, Taylor & Francis Journals, vol. 24(19), pages 1249-1260, October.
    • Handle: RePEc:taf:apfiec:v:24:y:2014:i:19:p:1249-1260
    DOI: 10.1080/09603107.2014.925053
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    2. Ajid ur Rehman & Man Wang & Haoyang Yu, 2016. "Dynamics of financial leverage across firm life cycle in Chinese firms: an empirical investigation using dynamic panel data model," China Finance and Economic Review, Springer, vol. 4(1), pages 1-22, December.
    3. Sultan Sikandar Mirza & Raheel Safdar & Yan Yu & M. Awais Gulzar, 2019. "Managerial Empowerment and Firm Risk-Taking," SAGE Open, , vol. 9(2), pages 21582440198, June.
    4. Tanveer Ahsan & Man Wang & Muhammad Azeem Qureshi, 2016. "Mean Reverting Financial Leverage and Firm Life Cycle: Theory versus Evidence (Pakistan)," Emerging Economy Studies, International Management Institute, vol. 2(1), pages 19-26, May.
    5. Tanveer Ahsan & Wang Man & Muhammad Azeem Qureshi, 2016. "Mean reverting financial leverage: theory and evidence from Pakistan," Applied Economics, Taylor & Francis Journals, vol. 48(5), pages 379-388, January.
    6. Rana El Bahsh & Ali Alattar & Aziz N. Yusuf, 2018. "Firm, Industry and Country Level Determinants of Capital Structure: Evidence from Jordan," International Journal of Economics and Financial Issues, Econjournals, vol. 8(2), pages 175-190.
    7. Robert Rubin, 2011. "The Global Financial Crisis and Its Ramifications," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 119(1), pages 5-12.
    8. Tanveer Ahsan & Muhammad Azeem Qureshi, 2017. "The impact of financial liberalization on capital structure adjustment in Pakistan: a doubly censored modelling," Applied Economics, Taylor & Francis Journals, vol. 49(41), pages 4148-4160, September.

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