The Impact of Imputed Interest on Equity Provisions on the Capital Structure of Austrian Firms

The goal of this article is to analyze the impact of imputed interest on equity provisions
(equity tax shields), that prevailed in Austria from 2000 to 2004, on the capital structure of firms. Although the Austrian system granted only a rather small dose of equity tax shields, we find that the tax regime achieved its goal to increase the equity ratios. We also see that the
government can control the companies' capital structures by changing the imputed interest rate on equity. Moreover, we can confirm the hypothesis of De Angelo/Masulis (1980) that non-debt tax shields act as a substitute for debt tax shields also in imputed interest on equity
tax systems. It is interesting to see that, even though imputed interest on equity can be used by the government to influence the capital structure, non-debt tax shields show a higher
significance than the imputed interest on equity. We also find strong and highly significant
autocorrelation of the capital structure showing that the capital structure is not adjusted to a
target level but rather the consequence of historical decisions.