Capital structure of firms when taxes are removed

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 no...

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Bibliographic Details
Published in:Journal of economic and administrative sciences 2015-05, Vol.31 (1), p.51-63
Main Author: Bader Alhashel
Format: Article
Language:English
Subjects:
Capital structure
Costs
Default
Dividends
Economic models
Equity
Hypotheses
Research & development expenditures
Stockholders
Tax benefits
Taxation
Taxes
Variables
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Summary: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.
ISSN:1026-4116
2054-6246
DOI:10.1108/JEAS-10-2013-0040