Debt tax benefits in a high tax emerging market : evidence from Brazil

Abstract

Purpose: This study hypothesizes that tax benefits encourage the use of third-party capital, and seeks to verify whether the tax benefit deriving from debts has a positive effect on Brazilian companies’ capital structure. Approach/Methodology/Design: Data on 259 nonfinancial companies over the period 20082018 are extracted from the Standard & Poor’s Capital IQ database and are analyzed through regression with dynamic data panel. The variables considered as tax benefit proxies are: marginal tax rate, kink, standardized kink and tax payment.The investigations comprise: trade off theory, pecking order theory, information asymmetry, bankruptcy costs and agency theory. Findings: A positive debt effect on capital structure, taxation as providing a systematic incentive for greater leverage, and that, Brazilian companies, despite the country’s heavy tax burden, are not taken full advantage of debt tax benefits. The study offers new evidence as to the speed of adjusting the indebtedness level relating to an optimal capital structure target. Brazilian companies have ground to contract more debt and maximize their tax benefit. Practical Implications: The study will contribute positively to the understanding of influence of high tax emerging market for the government, academia, banks, industry, managers, regulators, investors and other users. Originality/value: This study innovates by using MTR, kink and standardized kink to find debt tax benefits affecting emerging market companies’ capital structure.