How do listed non-financial companies adjust their capital structure after an increase in corporate income tax rate?
Abstract: Purpose: The purpose of this study is to investigate how listed non-financial companies in the German and French markets adjust their leverage after corporate income tax increases. Methodology: We performed a panel data regression analysis with a difference-in-differences approach based on Heider & Ljungqvist (2015) and Schandlbauer (2016). We used the firm size, market-to-book and tangibility as explanatory variables and tested for robustness by additionally including the following control variables: Return on assets, profitability, reported taxes / earnings. Foundation: Basis for this thesis have been 2.222 observations from 421 different companies listed in the Prime and General Standard of Germany and France in the periods of 2001 - 2004 and 2011 - 2014 which we obtained by Capital IQ, DataStream and Thomson Reuters. Conclusion: Companies in Germany and France significantly increase their leverage after an increase in corporate taxes. Moreover, we conclude better-capitalized companies increase their leverage, whereas worse-capitalized companies do not react as strong to the change in taxes due to a lack of financial flexibility. Firm size, Market-to-book (only in France), and tangibility are significant explanatory variables that can be used as proxies for the leverage behaviour.
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