Corporate Tax Reforms and Financial Choices: An Empirical Analysis

This paper assesses the effects that two different types of corporate tax reforms, recently implemented in Italy by two different Governments, have had on the debt choices of companies. In order to do so, we combine the information provided by a microsimulation corporate tax-model, with an empirical model of companies’ financial choices (a modified pecking order model), and apply this analytical framework to a panel of Italian manufacturing companies. The main results suggest that: (a) the tax system affects corporate leverage both through the relative cost of debt capital, and through cash flow; (b) the first reform, which operated mainly by reducing the relative cost of equity capital and was less costly for the Government, turns out to be more effective in reducing corporate leverage.