The paper investigates determinants of capital structure, focusing on tax incentives for debt. The paper makes use of a panel of Australian firms in two tax regimes: a classical regime, and a dividend imputation regime. An important feature is the identification of the economic model using Bayesian selection methods. This methodology offers a new way of examining and assessing interactions between variables where there are competing explanations, noisy data and no unifying theory. As hypothesized, the results demonstrate a significant tax coefficient during the classical era and an insignificant tax coefficient in the imputation era. Risk and signalling variables, represented by firm size, Z-score, operating risk and asset base are also found to help explain capital structure choice.
Barnett, G., Kohn, R. & Sheather, S.1996, ‘Bayesian estimation of an autoregressive model using Markov chain Monte Carlo’, Journal of Econometrics, vol. 74, pp. 237–54.
2.
Bishop, S., Crapp, H., Faff, R. & Twite, G.1994, Corporate Finance, 2nd edition, Holt, Rinehart and Winston, Sydney.
3.
Box, G. E. P. & Tiao, G. C.1992, Bayesian Inference in Statistical Analysis, John Wiley and Sons, New York.
4.
Bradley, M., Jarrell, G., & Kim, 1984, ‘On the existence of an optimal capital structure: Theory and evidence’, Journal of Finance, vol. XXXIX, no. 3, pp. 857–80.
5.
Chatfield, C.1995, ‘Model uncertainty, data mining and statistical inference’J. R. Statist. Soc. A, vol. 158, part 3, pp. 419–66.
6.
DeAngelo, H., & Masulis, R.1980, ‘Optimal capital structure under corporate and personal taxation’, Journal of Financial Economics, vol. 17, March, pp. 53–81.
7.
Fischer, E., & Heinkel, R.1989, ‘Dynamic capital structure choice: Theory and tests’, Journal of Finance, vol. 44, no. 1, 19–40.
8.
Frank, M. & Goyal, V. 2000, ‘Testing the pecking order hypothesis of capital structure’, SSRN working paper series.
9.
Gatward, P., & Sharpe, I. G.1996, ‘Capital structure dynamics with interrelated adjustment: Australian evidence’, Australian Journal of Management, vol. 21, no. 2, 89–112.
10.
George, E., & McCulloch, R.1993, ‘Variable selection via Gibbs sampling’, Journal of the American Statistical Association, vol. 88, pp. 881–89.
11.
Gordon, M.1971, ‘Towards a theory of financial distress’, Journal of Finance, vol. 26, pp. 347–56.
12.
Graham, J.1996a, ‘Debt and marginal tax rate’, Journal of Financial Economics, vol. 41, pp. 41–73.
13.
Graham, J.1996b, ‘Proxies for the marginal tax rate’, Journal of Financial Economics, vol. 42, pp. 187–221.
14.
Graham, J.2003, ‘Taxes and corporate finance: A review’, Review of Financial Studies, vol 16, pp. 1074–128.
15.
Graham, J. R., Lemmon, M., & Schallheim, J.1998, ‘Debt, leases, taxes and the endogeneity of corporate tax status’, Journal of Finance, vol. 53, pp. 131–61.
16.
Harris, M., & Raviv, A.1990, ‘Capital structure and the information role of debt’Journal of Finance, vol. 45, pp 321–49.
17.
Izan, H. Y.1984, ‘Identifying corporate distress in Australia: An industry relative analysis’Journal Of Banking & Finance, vol. 8, no. 2 pp. 303–20.
18.
Jensen, M.1986, ‘Agency costs of free cash flow, corporate finance, and takeovers’, American Economic Review, vol. 76, no. 2, 323–9.
19.
Kandel, S., McCulloch, R., & Stambaugh, R.1995, ‘Bayesian inference and portfolio efficiency’Review of Financial Studies, vol. 8, pp. 1–53
20.
Kass, R., & Raftery, A.1995, ‘Bayes factors’, Journal of the American Statistical Association, vol 90, pp. 773–95.
21.
MacKie-Mason, J.1990, ‘Do taxes affect corporate financing decisions?’Journal of Finance, vol. XLV, no. 5 pp. 1471–93.
22.
Manzon, G.1994, ‘The role of tax in early debt retirement’, Journal of the American Taxation Association, vol. 16, pp. 87–100.
23.
Modigliani, F., & Miller, M.1958, ‘The cost of capital, corporation finance and the theory of investment’, The American Economic Review, vol. XLVIII, no. 3, pp. 261–97.
24.
Modigliani, F., & Miller, M.1963, ‘Corporate income taxes and the cost of capital: A correction’, The American Economic Review, vol. LIII, no. 3, pp. 433–43.
25.
Myers, S.1977, ‘Determinants of corporate borrowing’, Journal of Financial Economics, vol. 5, pp. 147–75.
26.
Myers, S., & Majluf, N.1984, ‘Corporate financing and investment decisions when firms have information that investors do not have’, Journal of Financial Economics, vol 13, pp. 187–221.
27.
Pastor, L., & Stambaugh, R.1997, ‘Analyzing investments whose histories differ in length’, Journal of Financial Economics, vol. 45, pp. 285–331.
28.
Pastor, L & Stambaugh, R.1999, ‘Costs of equity Capital and Model Mispricing’, Journal of Finance, vol. 54, pp. 67–121.
29.
Pattenden, K.2002, ‘Estimating and evaluating proxies for the marginal tax rate’, Australian Journal of Management, vol. 27, no. 2, 187–202.
30.
Pattenden, K., & Twite, G.2004, ‘Tax and dividend policy under alternative tax regimes’, working paper, AGSM/Univeristy of Sydney.
31.
Raftery, A. E.1994, ‘Bayesian model selection in social research’, in Sociological Methodology 1995, ed. P. V. Marsden, Blackwells, Cambridge, Mass.
32.
Ross, S.1985, ‘Debt and taxes and uncertainty’, Journal of Finance, vol. LX, no. 3, pp. 637–57.
33.
Scholes, M., & Wolfson, M. A.1992, Taxes and Business Strategy: A Planning Approach, Prentice Hall, Englewood Cliffs.
34.
Shevlin, T.1990, ‘Estimating corporate marginal tax rates with asymmetric tax treatment of gains and losses’, Journal of the American Taxation Association, Spring, pp. 51–67.
35.
Shyam-Sunder, L. & Myers, S. C.1992, ‘Testing static trade-off against pecking order models of capital structure’, Journal of Financial Economics, vol. 51, pp. 219–44.
36.
Smith, A., & Roberts, G.1993, ‘Bayesian computation via the Gibbs sampler and related Markov chain Monte Carlo methods’, Journal of the Royal Statistical Society B, vol. 55, no. 1, 3–23.
37.
Smith, M., & Kohn, R.1996, ‘Nonparametric regression using Bayesian variable selection’, Journal of Econometrics, vol. 75, pp. 317–43.
38.
Titman, S., & Wessels, R.1988, ‘The determinants of capital structure choice’, Journal of Finance, vol. XLIII, no. 1, pp. 1–19.
39.
Twite, G.2001, ‘Capital structure choices and taxes: Evidence from the Australian dividend imputation tax system’, International Review of Finance, vol. 2, no. 4, 217–35.
