The Determinants of Colombian Firm´s Debt-Asset Ratio (1997-2003)

This article conveys a new approach to modeling corporate debt and financing decisions and how they are influenced by taxes using data from Colombia between 1997 and 2003. Primarily, it does not assume that debt decisions are separate from investment decisions as is common in the literature about the subject. In this paper investment is modeled as an endogenous variable using two stage least squares (2SLS). Moreover, it follows Gropp (1997) in estimating expected effective tax rates via rational expectations and allows for an assessment of the different tax proxies used in the literature. Empirical estimations suggest that investment is endogenous and that during the time period analyzed had no relationship with firm debt-asset relations. Moreover they portray that volatility considerations are fundamental determinants of the debt asset ratio. Particularly, the variance of the estimated income tax has affected the firms during the reference period. These results were calculated for firms facing financial constraints and they continue to be robust. The previous facts reveal that Colombian firms closely resemble the trade-off theory of leverage. Finally, it is clear that the economic crisis has affected firms severely during the period analyzed but that recovery was meager, even after the crisis, due to the fluctuating fiscal policy.