Do Equity Tax Shields Reduce the Leverage? The Austrian Case

The goal of this article is to analyze the impact of equity tax shield provisions, that prevailed in Austria from 2000 to 2004, on the capital structure of firms. We use data from Reuters and Datastream and perform fixed effects panel regression. We find that, in contrast to the goal of the tax reform, there was a significant increase in neither the book value equity ratio nor the market value equity ratio. For the capital structure at book values we even find an increase in the debt ratio. We observe that the firms followed the incentive immanent in the Austrian tax system to increase the volatility of capital structure with respect to the book value capital structure but not with respect to the market value capital structure. Apart from equity tax shields our study tries to identify non-tax related determinants (e.g. profitability, size, market-to-book ratio, fixed assets to total assets ratio, autocorrelation) and by this to confirm or falsify the agency theory, the pecking order theory and the tradeoff theory. This is done both for the book value capital structure and for the market value capital structure, where we see substantial differences between the book value capital structure and the market value capital structure determinants. In both cases we detect a strongly significant autocorrelation. For market value capital structure, we falsify the debt substitution hypothesis of DeAngelo/Masulis (1980).