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The impact of tax policy on corporate debt in a developing economy: a study of unquoted Indian companies

Author

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  • Christopher Green
  • Victor Murinde

Abstract

Taxation has potentially important implications for corporate behaviour. However, there have been few studies of the impact of taxation on companies in developing countries, and fewer still concerned with unquoted companies. In this paper, we study the impact of tax policy on the financial decisions of a sample of unquoted companies in India during the period 1989-99 when tax rates were generally reduced as part of a wider programme of financial liberalization. We examine the impact of the tax regime on company financing decisions, within the context of a model of company leverage, controlling for non-tax influences suggested by the theory of corporate finance. The analysis is carried out using a balanced panel consisting of the published accounts of 97 Indian unquoted companies, which reported continuously during 1989-99. The model is estimated using Generalized Methods of Moments (GMM). Estimates of the impact of the 1990s tax reforms are derived, and implications for policy are drawn.

Suggested Citation

  • Christopher Green & Victor Murinde, 2008. "The impact of tax policy on corporate debt in a developing economy: a study of unquoted Indian companies," The European Journal of Finance, Taylor & Francis Journals, vol. 14(7), pages 583-607.
    • Handle: RePEc:taf:eurjfi:v:14:y:2008:i:7:p:583-607
    DOI: 10.1080/13518470701705702
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    References listed on IDEAS

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    1. Eugene Nivorozhkin, 2004. "The Dynamics of Capital Structure in Transition Economies," Economic Change and Restructuring, Springer, vol. 37(1), pages 25-45, March.
    2. repec:zbw:bofitp:2003_002 is not listed on IDEAS
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    Cited by:

    1. Feld, Lars P. & Heckemeyer, Jost H. & Overesch, Michael, 2013. "Capital structure choice and company taxation: A meta-study," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2850-2866.
    2. repec:aer:wpaper:329 is not listed on IDEAS
    3. Mai, Nhat Chi, 2012. "Market timing, taxes and capital structure: evidence from Vietnam," OSF Preprints t3mvs, Center for Open Science.
    4. 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.

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    More about this item

    Keywords

    India; corporate finance; taxation;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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