The impacts of taxation on capital structure in BRICS countries

Chakrabarti, Rajesh and Gruzin, Alexander (2019) The impacts of taxation on capital structure in BRICS countries. Journal of Corporate Finance Research, 13 (3). pp. 94-11.

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Capital structure is an indicator of the value of a firm and is a key performance indicator concerning how efficiently a
company operates. Debt and leverage influence a company’s investment risks and influence the rate of return required by
investors. Therefore, decisions affecting capital structure choice have crucial long-term effects.
The aim of this study is to determine the effects of corporate tax rates on capital structure in public nonfinancial
companies based in BRICS countries. The specific object of our analysis is the evaluation of financial leverage as a
proportion of debt financing based on the amount of total assets. This analysis is carried out on a sample of BRICS
companies over the period from 2010 to 2015.
To conduct this research, panel data regression models are employed, including the fixed effects (FE), random effects
(RE) and generalised method of moments (GMM) models. Each BRICS country is analysed separately in order to avoid
biased estimates due to a host of significant country-specific differences.
The results presented herein indicate that effective tax rate is statistically significant, but the effect of taxation varies
across countries. For example, effective tax rate is an important capital structure determinant, and it is significant across
all countries. However in analytical terms, this investigation reveals that the most suitable regression model for the
majority of BRICS countries is the fixed effects method, although for Russia the most appropriate model is the random
effects method. To summarise, three separate hypotheses regarding the interplay of taxation and capital structure have
This research crucially serves to demonstrate facets of the complexity of the economic situation in the key economies
of BRICS countries. The generally-supported hypothesis implies that the higher the corporate tax rate, the more tax
benefits the company receives from using a tax shield. The results of this study indicate that contrary to most existing
literature, effective tax rate has a negative relationship with the capital structure in Russia, India and South Africa.
Moreover, various existing research studies in the field have been validated, and individual aspects of our results serve
to alternatively validate the tradeoff and the pecking order theories. The conclusions presented herein regarding the
complexities of the interplay between economic indicators between BRICS countries will be essential information in the
commercial and academic spheres and anyone concerned with emerging economies

Item Type: Article
Keywords: Financial Leverage | Capital Structure | Tax Shield | Effective Tax Rate | Return on Assets | Depreciation | BRICS
Subjects: Social Sciences and humanities > Social Sciences > Law and Legal Studies
JGU School/Centre: Jindal Global Business School
Depositing User: Amees Mohammad
Date Deposited: 20 Apr 2022 08:58
Last Modified: 20 Apr 2022 08:58
Official URL:


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