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Mag. Magdalena Haring Economic Impacts of Capital Gains Taxation Doctoral Thesis to be awarded the degree of Doctor of Social and Economic Sciences (Dr. rer.soc.oec.) at the University of Graz, Austria First supervisor: Univ.-Prof. Dr. Rainer Niemann Institute of Accounting and Taxation Second supervisor: Univ.-Prof. Dr. Sabine Kanduth-Kristen, LL.M. Centre of Entrepreneurship and Applied Science in Business Economics Graz, May 2011 Author´s Declaration Unless otherwise indicated in the text or references, or acknowl- edged above, this thesis is entirely the product of my own schol- arly work. Any inaccuracies of fact or faults in reasoning are my own and accordingly I take full responsibility. This thesis has not been submitted either in whole or part, for a degree at this or any other university or institution. This is to certify that the printed version is equivalent to the submitted electronic one. Foreword This doctoral thesis was written during my employment as a research assistent at the Institute of Accounting and Taxation at the University of Graz under the direction of Univ.-Prof. Dr. Rainer Niemann. To him I feel very grateful for offering me the chance to get to know the world of science. Furthermore, I thank Univ.-Prof. Dr. Rainer Niemann for the committed supervision of my doctoral thesis and for giving me valuable advice and support always when needed. He always encouraged new ideas and supported participation at conferences and exchange with colleagues from other universities. I thank Univ.-Prof. Dr. Sabine Kanduth-Kristen for her interest in my scien- tific work and her kind willingness to be my second supervisor. I am especially grateful that I had two colleagues and companions during my time as a research assistent. I thank Silke R¨ungerand Andrea Gauper for being my dicussants, critics and friends. Furthermore I want to thank my parents Maritta and Wilhelm Gruber. With- out their believe in my abilities and their financial and moral support through- out my studies this doctoral thesis would not have been possible. Finally, I owe very special thanks to my husband Werner for the patient and loving support and his unresting moral encouragement. To him I dedicate this work. I Contents Contents List of Tables VI List of Figures VI List of Abbreviations VIII List of Symbols XI 1 Introduction 1 1.1 Problem Assignment . .1 1.2 Structure of the Work . .3 2 Capital Gains Taxation and Corporate Capital Structure 4 2.1 Determinants of Corporate Capital Structure . .6 2.1.1 Taxation and Corporate Capital Structure . .7 2.1.2 Agency Theory and Corporate Capital Structure . 16 2.2 Capital Gains Taxation and Corporate Capital Structure in Austria . 18 2.2.1 Institutional Background . 18 2.2.2 Hypotheses Development . 19 2.2.3 Data and Summary Statistics . 21 2.2.4 Regression Analyses . 26 2.2.4.1 Regression Model . 26 2.2.4.2 Regression Results . 29 2.2.4.3 Robustness Checks . 33 2.2.5 Intermediate Summary . 35 2.3 Capital Gains Taxation and Corporate Capital Structure in Central and Eastern Europe . 37 II Contents 2.3.1 Institutional Background . 37 2.3.2 Hypotheses Development . 38 2.3.3 Description of the Data . 41 2.3.4 Regression Analyses . 44 2.3.4.1 Definition of Variables and Summary Statistics 44 2.3.4.2 Regression Model and Results . 46 2.3.4.3 Robustness Checks . 50 2.3.5 Intermediate Summary . 53 3 Capital Gains Taxation and Corporate Ownership 56 3.1 Determinants of Corporate Ownership . 57 3.1.1 Country-specific Determinants . 57 3.1.2 Firm-specific Determinants . 58 3.1.3 Taxation and Corporate Ownership . 60 3.2 Capital Gains Taxation and Corporate Ownership in Austria . 67 3.2.1 Institutional Background . 67 3.2.2 Model and Research Hypotheses . 69 3.2.2.1 Investment Decisions of Individual Investors . 69 3.2.2.2 Investment Decisions of Private Foundations . 70 3.2.2.3 A Numerical Example . 72 3.2.2.4 Hypotheses Development . 74 3.2.3 Ownership Structure of Austrian Companies . 74 3.2.3.1 The Sample . 74 3.2.3.2 Corporate Ownership from 1999 to 2004 . 75 3.2.4 Regression Analyses . 78 3.2.4.1 Definition of Variables and Summary Statistics 78 3.2.4.2 Regression Model and Results . 79 3.2.5 Intermediate Summary . 88 III Contents 4 Conclusion 90 A Appendix: Cross-correlation Tables 93 References 105 IV List of Tables List of Tables 2.1 Size of Corporations in the Sample . 22 2.2 Legal Form and Listing of Corporations in the Sample . 23 2.3 Industry of Corporations in the Sample . 24 e 2.4 Mean Values of Debtratio, τg and g from 1999 to 2004 . 25 2.5 Estimation Results for Specification 1.1 . 30 2.6 Estimation Results for Specification 1.2 . 32 2.7 Effective Tax Rates on Capital Gains . 34 e 2.8 Estimation Results for Different Definitions of τg ........ 35 2.9 Tax Rates in Eastern Europe 2009 . 38 2.10 Sample Generation Process . 42 2.11 Summary of Debt Ratios by Year . 42 2.12 Summary of Debt Ratios by Country . 43 2.13 Summary Statistics of Used Variables in Euro . 46 2.14 Estimation Results for Specification 2.1 and 2.2 . 47 2.15 Estimation Results for Specification 2.3 and 2.4 . 49 2.16 Estimation Results for Specification 2.5 . 50 2.17 Estimation Results for Specification 2.6 and 2.7 . 51 2.18 Estimation Results for Specification 2.8 and 2.9 . 52 2.19 Estimation Results for Specification 2.10 . 54 3.1 Tax Rates in Austria . 68 3.2 Present Values of Investment in Shares . 73 3.3 Mean Values of Owners of Austrian Corporations from 1999 to 2004 . 76 3.4 Development of Individual Investors and Private Foundations Invested in Family Firms . 78 V List of Abbreviations 3.5 Summary Statistics . 80 3.6 Estimation Results for Specification 3.1 and 3.2 . 81 3.7 Estimation Results for Specification 3.3 and 3.4 . 83 3.8 Estimation Results for Specification 3.5 and 3.6 . 84 3.9 Estimation Results for Specification 3.7 . 85 3.10 Summary statistics of F oundation if F oundation ≥ 0 . 87 3.11 Estimation Results for Specification 3.8 . 87 A.1 Cross-correlation Table for Specification 1.1 . 93 A.2 Cross-correlation Table for Specification 1.2 . 94 A.3 Cross-correlation Table for Specification 1.1 using τ e ...... 95 g 2 A.4 Cross-correlation Table for Specification 1.1 using τ e ...... 96 g 3 A.5 Cross-correlation Table for Specification 1.1 using τ e ...... 97 g 4 A.6 Cross-correlation Table for Specification 2.1 . 98 A.7 Cross-correlation Table for Specification 2.2 . 99 A.8 Cross-correlation Table for Specification 2.3 . 100 A.9 Cross-correlation Table for Specification 2.4 . 101 A.10 Cross-correlation Table for Specification 2.8 { 2.10 . 102 A.11 Cross-correlation Table for Specification 3.1 and 3.2 . 103 A.12 Cross-correlation Table for Specification 3.3 and 3.4 . 103 A.13 Cross-correlation Table for Specification 3.5 and 3.6 . 104 List of Figures e 1 Mean Values of the Variables Debtratio, τg and s from 1999 to 2004 . 25 2 Ownership Structures of Austrian Corporations from 1999 to 2004 76 VI List of Abbreviations List of Abbreviations AG Public Limited Company (Aktiengesellschaft) BG Bulgaria BGBl. Federal Law Gazette (Bundesgesetzblatt) CAPM Capital Asset Pricing Model CEE Central and Eastern Europe CZ Czech Republic DRD Dividends Received Deduction e.g. Example given EE Estonia EStG Austrian Income Tax Law (Einkommensteuergesetz) GLS Generalized Least Squares GmbH Private Limited Company (Gesellschaft mit beschr¨ankterHaftung) HR Croatia HU Hungary IRC International Revenue Code i.e. id est (that is) KMOG Kapitalmarktoffensive-Gesetz LT Lithuania LV Latvia NACE Statistical Classification of Economic Activities in the European Community OLS Ordinary Least Squares ONACE¨ Austrian Statistical Classification of Economic Activities PL Poland RO Romania RU Russia SI Slovenia SME Small and Medium Enterprises VII List of Symbols SK Slovakia TRA Tax Reform Act U.K. United Kingdom of Great Britain and Northern Ireland U.S. United States of Amerika UA Ukraine UGB Austrian Commercial Code (Unternehmensgesetzbuch) VIII List of Symbols List of Symbols Age Variable measuring the age of a corporation Corporate Corporate investors CorporateF oreign Foreign corporate investors CurAss Current assets d Dividend payout ratio Dj Market value of debt Dt Annual dividend payments DivR Dividend yield DebtRatio Book debt to total assets ratio Depr Depreciation Ej Market value of common equity F F-test F amily Dummy variable indicating whether the corporation is family-dominated F oundation Private foundations g Fraction of taxable capital gains GDP Gross domestic product per capita in U.S. Dollar GL Net tax benefit of debt i Market rate of return after corporate taxes iτ Market rate of return after corporate and individual taxes Ind Industry Individ Individual investors of a corporation IndividD Dummy variable indicating if a corporation is dominated by individuals Individ ≥ 10% Individual investors holding at least 10 % of a corporation IX List of Symbols Individ ≥ 1% Individual investors holding at least 1 % but less than 10 % of a corporation Individ < 1% Individual investors holding less than 1 % of a corporation IndividF oreign Foreign individual investors Legal Dummy variable indicating the legal form of a corporation lnSales Natural logarithm of the sales of a corporation Loss Proxy variable for loss-making corporations NOL Dummy variable accounting for net operating losses in pre- vious years N Number of observations P0 Acquisition price PT Market price at the end of the holding period PL P eriod Profit or loss per period P rofit Profitability PV aR Present value of an investment after the tax reform aR PVpF Present value of an investment by a private foundation after
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