Capital structure of firms when taxes are removed

Abstract

Purpose – The purpose of this paper is to further the understanding of the non-tax benefits of debt. Design/methodology/approach – This paper analyzes the capital structure of firms when taxes are removed by analyzing firms in an emerging market, Kuwait, where personal and corporate taxation does not exist. Findings – The leverage of firms in markets with no taxes are affected by the same leverage factors that affect firms where taxes are present. Non-tax benefits are economically significant and are almost 16 percent of firm value for the average leveraged firm. Practical implications – Given such a finding and the positive effect of debt on firm value, there should be policies to facilitate bank lending and more efficient access to credit for firms. Originality/value – The paper provides an estimate of the size of the non-tax benefits of debt.