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Abstract

The objective of this article is to investigate the effects of the Tax Reform Act of 1986 (TRA86) on financial characteristics of firms in the natural resources industry. Financial characteristics of the post-TRA86 period are compared with financial characteristics in the pre-TRA86 period in a multivariate analysis of covariance approach. The financial characteristics examined are the mode of asset acquisition and the method of external financing. The evidence suggests that tax law changes under TRA86 led to an increase in the proportion of operating assets acquired by lease rather than by purchase. The results failed to confirm the hypothesized effect of tax law changes on the mix of debt and equity in the capital structure. Marginal support is provided for the joint effect of the TRA86 changes and the firm's state of tax exhaustion. The results have tax policy implications regarding the influence of the alternative minimum tax and the tax wedge between debt and equity on business decisions.

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Economic Impact of Taxes On Financial Characteristics of the Natural Resources Industry

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