Tax Behavior and Financing Behavior of Corporate Managers. Are Corporate Financing Rules Distorted ?

Abstract

Most General Tax Codes in countries around the world contain tax optimization provisions that affect the tax behavior of corporate managers and, by extension, their investment, financing and earnings behavior. Corporate managers are more inclined to make financing decisions for tax purposes rather than on the basis of management objectives. Under these conditions, corporate managers, anxious to maximize the value created by investment, resort to tax planning strategies that distort financial decisions from the outset. This paper aims to analyzing the influence of tax behavior on financing (financial leverage) behavior of corporate managers. A corporation generally has two overall sources of financing: debt capital and equity capital. Tax law treats these two types of capital differently. Financial leverage is the ratio of debt capital to equity capital. The paper applies the generalized method of moments (GMM) to dynamic panel data. The sample used covers 21 firms, i.e. 11 banks for the period from 2011 to 2020 and 10 DFSs for the period from 2016 to 2021. It turns out that financial leverage behavior is influenced more positively by corporate income tax (CIT), then by dividends (DIVIDEND); and negatively by interest on debt (INTEREST), by cash flow (CASH_FLOW) and by past financial leverage (LEVERAGE( 1)). This paper is one of the first to extend the literature by identifying the main determinants of financing behavior, notably the positive effect of corporate income tax (CIT).