Capital structure of firms when taxes are removed
Journal of Economic and Administrative Sciences
ISSN: 1026-4116
Article publication date: 18 May 2015
Abstract
Purpose
The purpose of this paper is to further the understanding of the non-tax benefits of debt.
Design/methodology/approach
This paper analyzes the capital structure of firms when taxes are removed by analyzing firms in an emerging market, Kuwait, where personal and corporate taxation does not exist.
Findings
The leverage of firms in markets with no taxes are affected by the same leverage factors that affect firms where taxes are present. Non-tax benefits are economically significant and are almost 16 percent of firm value for the average leveraged firm.
Practical implications
Given such a finding and the positive effect of debt on firm value, there should be policies to facilitate bank lending and more efficient access to credit for firms.
Originality/value
The paper provides an estimate of the size of the non-tax benefits of debt.
Keywords
Acknowledgements
The author would like to thank Utpal Bhattacharya, Jess Cornaggia, Eitan Goldman, Richard Shockley, Irina Stefanescu, Xuan Tian, Charles Trzcinka, Jun Yang, Xiaoyun Yu, Alex Borisov, Peggy Huang, and seminar participants at Indiana University – Bloomington. This work was supported and funded by Kuwait University Research Grant No. [ZI01/14]. Any remaining errors in this paper are the author’s own.
Citation
Alhashel, B. (2015), "Capital structure of firms when taxes are removed", Journal of Economic and Administrative Sciences, Vol. 31 No. 1, pp. 51-63. https://doi.org/10.1108/JEAS-10-2013-0040
Publisher
:Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited