The Impact of Institutional Ownership on the Relationship between Tax and Capital Structure

Subject Areas : Financial Mathematics

Allah Karam Salehi ¹ , Abbas Baharipour ² , Sajjad Mohammadi ³

1 - Islamic Azad university, Masjed-soleiman Branch, Khouzestan, Iran
2 - Islamic Azad University, Khorramshar-Persian Gulf International Branch, Khouzestan, Iran.
3 - Islamic Azad University, Khorramshar-Persian Gulf International Branch, Khouzestan, Iran.

Received: 2016-11-17 Accepted : 2017-01-30 Published : 2016-11-01

Keywords: Capital Structure, tax, Institutional Ownership,

Abstract :

One of the reasons that companies avoid paying their taxes is that they choose to use debts for their funding. In other words, tax saving, an activity of companies to avoid taxpaying, can be used to finance corporate projects. Furthermore, since institutional owners are more inclined to supervise, they may shrink managerial behaviors to avoid taxpaying. In this study, institutional owners’ supervisory role about tax efficiency on corporate capital structure was investigated. For this purpose, a sample of 98 companies from 2005 to 2014 was selected from companies listed on Tehran Stock Exchange (TSE). Following the research conducted by Kramer, multiple linear regression based on panel data and the econometric software Eviews were used for testing the research hypotheses. The results show that tax has a negative and significant impact and institutional ownership has a positive and significant impact on capital structure. In addition, the institutional ownership in corporate companies impacts and adjusts the relationship between tax and capital structure.

References:

[1] Brailsford T. J., Barry O.L., Pua S.L.H., “On the relation between ownership structure and capital struc            

      ture”, Accounting and Finance, 2002, P.42, 1-26.

[2] Chavoshi, K and Ahmadi, N. “The effect of changes to Article 105 of Direct Taxation Act on dividends and    

      capital structure of listed companies on Tehran Stock Exchange (selected industries)”. Tax Journal; issue  

      19: 7-31. [in persian], 2013.

[3] Deangelo, H. & Masulis, R. W. “Optimal Capital Structure under Corporate and Person Taxation”. Journal    

      of Financial Economics.1980.

[4] Gaud. K. Bender.K. & Marcellino, P.A. “Examining gender on corporate boards: a 5. regional study”. Cor 

      porate Governance, 2007, 2, P. 24–31.

[5] Hampton. “Does corporate governance matter in competitive industries?”, Journal of Financial Economics,  

     1989, 95, P. 312-331.

[6] Hemmelgarn, T, and Teichmann, D. “Tax reforms and the capital structure of banks. International Tax and    

    Public Finance”, 2014, 21(4), P.645-693 .

[7] Izadinia, N and Rassaiyan, A. “Capital structure and corporate income tax in Iran”.Tax Journal, 2009,issue  

      IV, year VII 52, P.31-43.

[8] Kramer, R. “Taxation and Capital Structure Choice: The Role of Ownership”. Journal of Economics, 2015,    

     117(3), P.957-982.

[9] Lim, Y.D. “Tax Avoidance, Cost of Debt and Shareholder Activism: Evidence from Korea. Journal of Bank  

      ing and Finance”, 2011, P.456-470.

[10] Faccio, M and Jin Xu. “Tax and Capital Structure, Krannert School of Management, Purdue University”.   

        2012.

[11] Mashayekh, SH and Shahrukhi, S. “Factors influencing the capital structure”. Accountant monthly maga   

        zine, 2016, 13.

[12] Pajooyan, J. “Public sector economy (taxes) Tehran, Tarbiat Modarres University”. 2001.

[13] Plesko, G, A. “The Tax Advantage of Corporate Debt After Tax Reform: A Direct Test of the Effect of An 

       ticipated Tax Rate Changes on Corporate Leverage, Working paper, available in ssrn.com”. 1994.

[14] Setayesh, M, Monfared Maharlouie, M and Ebrahimi, F. “Factors affecting the capital structure from the   

       perspective of agency theory”. Shiraz University Journal of Accounting Developments, first issue, third

       period, 2011, P. 55-89.

[15] Sibilkov,V . “Asset Liquidity and Capital Structure”, working paper: http://papers.ssrn.com. 2005.