Review article

Theoretical models of capital structure of companies and their tax law aspects

Jasna Bogovac ; Polytechnic school of social sciences, Zagreb, Croatia

Abstract

Theoretical models of capital structure of companies shed light on certain factors affecting pertinent management-level decisions. Borrowing presents an interest tax shield, which is a significant tax-related aspect of these models. Other elements of the tax law
system have often been subject of research in terms of their effect on management decisions concerning borrowing, profit retention or issuing new shares, but those elements are rarely observed within the framework of theoretical models. This paper specifically deals with the theoretical models of capital structure of companies: the Modigliani-Miller theory, Trade-off theory, Agency theory, Signalling
theory, and the Packing Order theory. The aim of the paper is to explore these theories, analyse and complement them with tax law aspects. For this purpose, the author presents relevant research studying the impact of various tax and non-tax variables in company
capital structure. Tax law aspects which add to the comprehensiveness of the theoretical models are also identified. The results of this analysis facilitate the appreciation of the importance of the tax law aspects in capital structure decision. This provides guidelines for the establishment
of a tax system which would stimulate entrepreneurship and facilitate sustainable development of the country. A neutral, simple, transparent and stable tax system, in line with efficient tax systems of other countries, provides a solid basis for achieving economic
goals. General legal security and the stability of the tax system will surely motivate corporations to direct their activities at substantial business challenges, while at the same time reduce the appeal of various instruments of tax evasion.

Keywords

tax law system; capital structure; corporate tax; interest tax shield; principles of taxation

Hrčak ID:

74550

URI

https://hrcak.srce.hr/74550

Publication date:

28.10.2011.

Article data in other languages: croatian german

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