IMPLICATIONS OF TAXES ON CORPORATE FINANCIAL AND INVESTMENT POLICIES

Abstract

To date, the empirical literature has struggled to reach a consensus on how corporate taxes influence the capital structure decisions. This thesis, therefore, seeks to empirically explore the effect of taxes on corporate financial decisions and investment policies by proposing a new argument of the potential association between corporate taxes and expected costs of financial distress through changes in the firm’s market value. This thesis is divided into three main essays in order to examine the effect of corporate taxes on both static and dynamic trade-off theory of capital structure, and investment policies in the context of corporate risk-taking. Essay one exploits a sizeable and unique corporate tax cut enacted in Thailand in 2012 to empirically explore the tax sensitivity of leverage, shows that firms significantly reduced leverage after the tax cut, however, the tax effects of leverage only remain significant in financially unconstrained firms. Essay two further examines the effect of taxes on capital structure adjustment speeds under the dynamic trade-off theory, and the results show that taxes increase the speed of adjustment toward target capital structure. Lastly, essay three utilizes the relation between taxes and the expected distress costs in examining how corporate taxes affect corporate risk-taking decisions, and show that firms take more risk in their investment decisions when tax rates are high. Overall, the empirical evidence found in this thesis reveals an important role of taxes in corporate capital structure and structure of corporate investment decisions which can be beneficial to policy makers when considering the alteration of tax rates, as it will affect both corporate financial and investment decisions.