Capital Structure or Debt Tax Shielding Ratio: An Empirical Investigation for Belgian Firms
VUB Money & Finance Working Paper No. 01-03
30 Pages Posted: 1 Oct 2001
Date Written: September 26, 2001
Abstract
So far research on capital structure choice has yielded little support for the trade-off theory of capital structure choice. Berens and Cuny (1995) argue that most of the existing research is not suited for investigating the relevance of this theory, as firms can avoid tax payments completely without being fully debt-financed. It would therefore be more appropriate to consider the extent to which firms avoid taxes, their so-called debt tax shielding ratio, rather than their leverage. It could then also be argued that the theoretical determinants of capital structure choice should explain firms' debt tax shielding ratios. In this paper I investigate whether the trade-off theory can explain the variance in debt tax shielding by Belgian firms. The results provide hardly more support for the trade-off theory than traditional research on the determinants of capital structure choice.
Keywords: capital structure, trade-off theory, tax shielding
JEL Classification: G32
Suggested Citation: Suggested Citation
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