Doctoral Thesis

Home , Taxation in Canada, Tax rates in Europe

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 throughout 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 beschränkterHaftung) 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 previous 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 the tax reform PV bR Present value of an investment before the tax reform

bR PVpF Present value of an investment by a private foundation before the tax reform Quoted Dummy variable indicating whether a corporation is quoted r Growth rate R2 Coeﬃcient of determination s Fraction of taxable Austrian investors t Time index

X List of Symbols

T Holding period T anAss Tangible assets T axreform Dummy variable indicating the periods after a tax reform T hincap Dummy indicating if a thin-capitalization rule exists T otAss Total assets

Vj Market value of a ﬁrm WBI Index of the Vienna Stock Exchange

Xj Discounted cash flows of a firm α Axis intercept of the regression function β Coefficient of the regression function Disturbance term of the regression function λ Variable accounting for the discounting effect in the capital gains tax rate

ρk Weighted average cost of capital

τc Tax rate on corporate profits e τc Effective marginal tax rate on corporate profits

τd Tax rate on dividend payments

τe Tax rate on income from equity e τe Eﬀective marginal tax rate on income from equity

τen Entry tax rate of an Austrian private foundation

τg Statutory tax rate on capital gains e τg Eﬀective tax rate on capital gains

τi Tax rate on interest payments

τint Intermediate tax rate of an Austrian private foundation e τi Tax rate of the marginal investor in debt

τs Subsequent tax rate of an Austrian private foundation

XI 1 Introduction

1 Introduction

1.1 Problem Assignment

The current economic crises and the construction of a safer ﬁnancial system is one of the topics of interest in daily news. Financial institutions have been saved by public rescue packages and capital markets start to rebound. Now, several issues are discussed, e.g. how to rebuild the ﬁnancial system to avoid future breakdowns.

On the one hand, the low equity capitalization of corporations and especially of ﬁnancial institutions is considered to be too small to make up for possible loan defaults. The gradual implementation of “Basel II” in the European Union, which is basically a regulatory framework to strengthen the equity base of corporations, is seen as one step towards a stable ﬁnancial environment.

On the other hand, there is an ongoing discussion about how to confine ex- cessive speculation on capital markets. Not only transaction taxes or taxes on the sum of total assets of banks are being discussed, also additional taxation of capital gains of individual investors is being considered. These taxes are intended to raise revenue to refinance the state’s costs of helping corporations out of the financial crises. However, it is not evident whether strengthening the corporate equity base and raising additional tax revenue are complementary or opposing tax policy objectives.

The taxation of capital gains is matter of discussion in many European countries. Austria changed the taxation of capital gains twice over the last ten years. In Central and Eastern Europe (CEE) the last decade was affected by a tax competition. Not only flat tax rates on corporate level have been introduced but also several changes in individual capital gains taxation occurred. For the tax authorities to be able to evaluate the impact and effectiveness of the taxation of capital gains, the reaction of corporations to a change in capital gains taxation needs to be investigated.

Corporations, which have individual shareholders that are exposed to capital gains taxation, face higher costs of equity as their investors will demand higher rates of return to be compensated for the additional taxation. Further, debt ﬁnancing is already treated preferentially in most European countries, as it is

1 1 Introduction deductible from the tax base. A rise in capital gains taxation may lead to an increase in debt ratios, as the relative advantage of debt increases.

In Austria and continental Europe, where the majority of corporations are family-owned1, individual capital gains taxation may inﬂuence ownership structures. Additional taxes on capital gains could induce owners to adjust their investment decisions to avoid taxation. Shareholders could sell shares or reorganize the ownership structure of a corporation. This may lead to lower tax revenue of capital gains taxation than expected.

These two issues - the impact of capital gains taxation on ﬁnancing decisions and ownership structures of corporations - are considered and investigated in this doctoral thesis. So far only a few studies included individual investor taxation in an empirical investigation of the tax beneﬁt of debt and almost no studies exist which examine the impact of individual taxation on ownership structures of corporations. Previous studies mostly used U.S. data for the investigation of reactions to individual capital gains taxation. To my knowledge, no study exists that includes individual capital gains taxation and uses a sample of listed and non-listed corporations of European countries.

This thesis aims to close this research gap by investigating the impact of individual capital gains taxation on corporate financial policy and investor structure. First, the impact of a change in capital gains taxation in Austria is examined to see whether corporations have increased the debt ratio. Fur- ther, an analysis using 13 CEE-countries is conducted to see whether leverage differs in these countries due to differences in the net tax benefit of debt. Moreover, the impact of the change in capital gains taxation in Austria on shareholder structures of Austrian firms is analyzed. For all investigations, I use a unique sample of listed and non-listed firms and additionally account for family-dominated firms in Austria. By conducting these analyses, the question whether individual taxation - especially capital gains taxation - influences decisions of corporations and their shareholders shall be answered.

1 See Hennerkes / Berlin / Berlin (2007), p. 27 and Austrian Institute for SME Research (2008), p. 2.

2 1 Introduction

1.2 Structure of the Work

This doctoral thesis is structured in two main chapters.

Chapter 2 investigates the impact of capital gains taxation. First, section 2.1 offers an overview over existing literature on the determinants of corporate capital structure. The first empirical investigation of the impact of the tax reform 2001 in Austria, that expanded the capital gains taxation, begins in section 2.2. First the legal background is explained (2.2.1), then a model on the impact of capital gains taxation is developed to derive the hypotheses (section 2.2.2). The description of the sample and summary statistics are shown in section 2.2.3. Section 2.2.4 includes the regression model (section 2.2.4.1), the estimation results (section 2.2.4.2) and some robustness checks of the used specifications (section 2.2.4.3). Section 2.3.5 offers an intermediate summary.

The second empirical analysis investigating the impact of capital gains taxation for a sample of corporations from CEE begins in section 2.3. Also this investigation contains the legal background (section 2.3.1), the hypotheses development (section 2.3.2) and a description of the sample (section 2.3.3). The deﬁnition and summary statistics for the variables of interest are shown in section 2.3.4.1, followed by the results of the estimation (section 2.3.4.2) and robustness checks (section 2.3.4.3). Section 2.3.5 again oﬀers an intermediate summary.

The impact of individual capital gains taxation on corporate ownership is shown in chapter 3. Also this chapter includes a literature overview on the determinants of ownership structure (3.1). This overview is followed by a model showing the impact of individual capital gains taxation on investment decisions of individual investors and private foundations (3.2.2), which leads to the hypotheses. Section 3.2.3 describes the sample used and oﬀers some insights on the development of ownership structures in Austria. The hypotheses are tested in section 3.2.4, section 2.3.5 oﬀers intermediate results of the third investigation of this paper.

Section 4 summarizes this thesis and concludes.

3 2 Capital Gains Taxation and Corporate Capital Structure

2 Capital Gains Taxation and Corporate Capital Structure

The taxation of equity and debt differs in most European countries. While interest payments for debt are tax-deductible, payments to investors providing equity are not. Interest payments generate tax shields which may lower the corporate tax burden. Existing taxation of debt and equity causes distortions of financing behavior, as debt becomes more attractive due to taxation. There have been many scientific contributions concluding that the deductibility of interest on corporate level encourages corporations to use debt financing.2

The taxation of capital gains taxation for individuals has just recently been expanded in Austria by 2011. The proponents argue with a more fair taxation of labor income and income from capital and hope for additional tax revenue. Critics of additional capital gains taxes point out that the capital market in Austria is too small and too weak to carry the additional burden of a broader taxation. It would lead investors to transfer their capital to other low-tax- countries.

The problem of a low market capitalization in Austria has been a focus of earlier governments. In 2001, a law to strengthen the Austrian capital market (Kapitalmarktoﬀensive-Gesetz - KMOG) was implemented. The measures should encourage individuals to invest in shares rather than in traditional savings instruments and therefore lead to lower debt ﬁnancing of Austrian corporations. But the KMOG also included a tax reform of the taxation of capital gains: by 2001 the threshold for taxable capital gains was reduced from 10 % to 1 %.

A lower threshold of taxable capital gains raises the costs for an investor holding shares as an additional taxation has to be borne. Investment in shares becomes less attractive, especially compared to investment in bonds. Debt ﬁnancing was already treated preferentially before the expansion of the capital gains taxation, as interest payments for debt are tax-deductible in Austria on the corporate level. A lower threshold for taxable capital gains further raises the costs for investors providing equity.

2 See section 2.1 for a literature overview.

4 2 Capital Gains Taxation and Corporate Capital Structure

The change of the threshold for taxable capital gains in Austria offers the opportunity to investigate whether individual taxes, especially individual capital gains taxation, is a determinant of corporate debt. The tax reform 2001 is used to conduct an analysis for a unique sample of Austrian corporations from 1999 to 2004 to find out if there were significant changes in the capital structure due to the implementation of a higher capital gains taxation at individual investor level. The sample includes data of non-listed corporations, which represent the predominant part of companies in Austria. Additionally, the analysis controls for family-controlled firms in the sample.

Not only in Austria the taxation of capital gains was changed. Due to the ongoing tax competition in CEE, several changes in capital gains taxation took place. Bulgaria changed its taxation of capital gains in 2008 to a flat taxation of 10 %. Before, capital gains were aggregated with other income and taxed at the ordinary income tax rate. Also the Czech Republic established a flat tax on capital gains in 2008. Estonia was the first country in Eastern Europe that introduced the flat tax in 1994 and has consequently reduced the tax rate since then. Just recently, Hungary introduced a flat tax regime by 1st of January 2011.

This variation in tax rates in CEE-countries offers a unique opportunity to investigate whether the net tax benefit of debt compared to equity influences the debt level of different countries. The corporations, that are most likely to be affected by changes in capital gains taxation, are growth firms who offer the majority of returns to investors via retained earnings. The shareholder structure as well as the dividend payout ratio of a company affect the tax advantage of debt. To my knowledge no study exists which investigates the impact of the net tax benefit of debt including capital gains taxation that also collects and implements firm-specific data on corporate ownership and payout ratios when examining CEE-countries. The investigation of a unique data sample of corporations from CEE from 2001 to 2009 aims to find out if there are significant differences in the capital structure due to taxation.

5 2 Capital Gains Taxation and Corporate Capital Structure

2.1 Determinants of Corporate Capital Structure

Which factors determine the capital structure of a corporation has been discussed extensively in the scientiﬁc community for several decades. As a starting point Modigliani and Miller (1958) showed, that in a world without taxes the capital structure of a company is irrelevant for its value (Vj) as the value is only determined by the discounted cash ﬂows (Xj) generated by the assets of a company: Vj ≡ (Ej + Dj) = Xj/ρk. Here Ej is the market value of common equity, Dj is the market value of debt and ρk are the weighted average cost of capital.3

The drawback of the work of Modigliani and Miller (1958) is the assumption of perfect capital markets. Factors like taxes, bankruptcy costs, asymmetric information or agency costs are not included in their model.4 Modigliani and Miller (1963) published an extension to their article in which they implemented corporate taxes. By doing so the best financing strategy for a company would be to maximize debt financing as this adds value to the levered firm compared to an unlevered firm due to the tax shield generated by deductible interest payments.5

Stiglitz (1969a) criticized the assumptions of the Modigliani-Miller-Theorem that individuals can borrow at the same market rate as firms and the assumption of no bankruptcy costs.6 Stiglitz (1969b) examines the impact of taxes on income, capital gains and wealth on the demand for risky assets. Many tax policies include special provisions for capital gains to encourage risk taking. Stiglitz (1969b) shows that lower taxes on capital gains of risky assets compared to safe assets only lead to more risk-taking of investors if specific assumptions of absolute and relative risk aversion are fulfilled.7

Based on the work of Modigliani and Miller several theories were developed by the scientiﬁc community in the following years. The trade-oﬀ theory is

3 See Modigliani / Miller (1958), p. 268. 4 See Brealy / Myers / Allen (2006), p. 469. 5 See Modigliani / Miller (1963), p. 433ff. 6 See Stiglitz (1969b), p. 784ff. 7 See Stiglitz (1969a), p. 263ff.

6 2 Capital Gains Taxation and Corporate Capital Structure considered to be the main theory regarding the impact of taxes on the capital structure of corporations. Other theories focus on the impact of agency theory aspects on corporate capital structure choice.

2.1.1 Taxation and Corporate Capital Structure

The trade-off theory explains corporate financing by the hypothesis that companies try to balance the tax advantage of debt against the disadvantage of financial distress. Following the trade-off theory, corporations will increase their debt ratio until the gain of the extra tax shield equals the increase in present value of the potential costs of financial distress.8

Baxter (1967) shows that the costs of ﬁnancial distress are low if the debt ratio is low. In this cases the cost of capital can be lowered due to tax shields of interest payments. On the other hand, extreme leverage causes the cost of capital of a company to rise.9 Kraus and Litzenberger (1973) show analytically that the value of a company is not only determined by its discounted future cash ﬂows and the present value of the tax shield of interest payments but also has to be reduced by the present value of bankruptcy costs.10

Warner (1977) as well as Andrade and Kaplan (1998) provide studies on the level of bankruptcy costs. Warner (1977) assesses direct costs of bankruptcy with less than 1 % of the value of the ﬁrm. He additionally points out, that indirect costs of bankruptcy exist, which are not measureable but have to be considered.11 Andrade and Kaplan (1998) estimate that bankruptcy costs amount to 10 % to 20 % of the companies’ value.12

Miller (1977) criticized the trade-oﬀ theory by mentioning that the costs of ﬁnancial distress were too small to explain the debt ratios of corporations. He argues, that taxes at investor level additionally have to be implemented, as this might change the tax advantage of debt. At the time of the article by Miller (1977), income from interest was taxed at a higher rate than income

8 See Myers (2001), p. 88. 9 See Baxter (1967), p. 395ff. 10 See Kraus / Litzenberger (1973), p. 911ff. 11 See Warner (1977), p. 337ff. 12 See Andrade / Kaplan (1998), p. 1443ff.

7 2 Capital Gains Taxation and Corporate Capital Structure

13 from equity. Miller (1977) calculates the tax advantage of debt (GL) by h (1−τc)(1−τe) i GL = 1 − DL, where τc is the tax rate on corporate profits, τe the (1−τi) tax rate on income from shares and τi the tax rate on interest payments. Dj is the market value of debt. If (1 − τi) = (1 − τc)(1 − τe), the net tax benefit of debt is zero. Miller (1977) concludes that the capital structure is irrelevant for the value of a firm as the tax-advantage of debt on company level is offset by the tax-disadvantage at investor level. This is the case if the taxation of interest for the investor is equal to the combined taxation of equity income at company and investor level.14

In the context of the trade-oﬀ theory Scott (1977) sets up a multi period model and arrives at the conclusion that companies with more tangible assets can have a higher debt-level, because the possibility of bankruptcy becomes smaller the higher the liquidation value of assets is.15

Not only the net tax benefit of debt can serve as a tax shield, but also other tax deductible items like depreciation, loss carry-forwards or investment tax credits. The so called substitution hypothesis was first developed by DeAngelo and Masulis (1980). They state that corporate leverage is also determined by the existence of other tax-shields than interest payments. The more non-debt tax shields are available for corporations the lower the debt levels because the marginal tax rate decreases. According to DeAngelo and Masulis (1980) these different tax shields are the reason why every corporation has its own optimal debt ratio.16 The authors also mention other studies which empirically support their idea that the debt ratio of a corporation is also determined by other tax deductible items than interest payments and that the capital structure influences the value of a firm.17 Papers of Ang and Peterson (1986), Bradley,

13 In the 1970ies the dividends and interest payments were taxed together with the ordinary income. The top tax rate on ordinary income was 70 % in 1977. The tax rate on capital gains was between 28 % to 39,875 % from 1970 to 1977. See Internal Revenue Service (2011). 14 See Miller (1977), p. 267ff. 15 See Scott (1977), p. 33ff. 16 See DeAngelo / Masulis (1980), p. 3ff. 17 Studies mentioned are: Miller / Modigliani (1966) and Masulis (1980) on the relevance of debt for the value of a firm; Vanik (1978), Muskie (1976), Siegfried (1974) and Rosenberg (1969) show, than investment tax credits are different for different industries; Scott / Martin (1975) and Scott (1972) and Schwartz / Aronson (1967) find different debt ratios in companies in different industries.

8 2 Capital Gains Taxation and Corporate Capital Structure

Jarrell and Kim (1984) and others tried to test the model of DeAngelo and Masulis empirically but could not achieve signiﬁcant results.18

Following DeAngelo and Masulis (1980), MacKie-Mason (1990) also investigates the impact of tax shields on corporate financing. His study differs from previous work in two ways: first, he examines the impact of tax shields on the marginal tax rate more precisely. Second, he does not add debt levels to his empirical model but the incremental decision for debt. This decision is measured by a dichotomy dependent variable capturing the decision for debt or equity. He considers this a better measure as debt levels are cumulative decisions of several years under different conditions. An investigation of incremental decisions should offer better results regarding tax effects. His results confirm his hypothesis that larger tax shields from tax loss carry-forwards lead to a lower probability of debt issue due to a lower marginal tax rate. He also finds evidence that investment tax credits reduce the probability that a firm will choose debt if this firm is near tax exhaustion.19 Future empirical studies were based on the article of MacKie-Mason (1990).20

Graham (1996a, 1996b) and Gropp (1997) calculate marginal tax rates and find out that the level of the tax rate significantly influences the incremental decision for debt or equity.21 Graham et al. (1998) investigate why different approaches to explain the debt policy of corporations lead to different results. They state that the differences are caused by the marginal tax rate used for the investigations. Graham et al. (1998) use the taxable income before financing to calculate the marginal tax rate, as this result is not endogenously affected by the debt policy of a corporation. Using this measure of the marginal tax rate, Graham et al. (1998) find a significant impact of taxation on debt ratios of corporations.22 Graham (2000) calculates the marginal corporate tax rates by implementing regulations of the U.S. tax code, such as loss carry-forwards and investment tax credits. He shows that corporations do not use all tax shields of interest, especially when other tax deductible items exist. He estimates that

18 See Ang / Peterson (1986), Bradley / Jarrell / Kim (1984), Fischer / Heinkel / Zechner (1989), Long / Malitz (1985) and Titman / Wessels (1988). 19 See MacKie-Mason (1990), p. 1471ff. 20 See Dhaliwal / Trezevant / Wang (1992), Trezevant (1992) and Cloyd / Limberg / Robinson (1997). 21 See Graham (1996a), p. 41ff., Graham (1996b), p. 187ff. and Gropp (1997), p. 488ff. 22 See Graham / Lemmon / Schallheim (1998), p. 131ff.

9 2 Capital Gains Taxation and Corporate Capital Structure

US-corporations could increase their firm value by 7.3 % if they would lever up and use interest tax shields.23 Graham and Tucker (2006) investigate a sample of tax shelters used by corporations in the United States to find out weather firms participating in a shelter use less debt due to other tax deductions. By multivariate regression analyses the authors find out that companies using tax shelters show less debt financing on average than nonshelter firms. This results suggest that tax shelters are subsitutes for interest tax deductions.24

Gordon and Lee (2001) test the trade-off theory including small companies in their sample and find out that taxes have the highest impact on very small and very big firms.25 Gordon and Lee (2007) extend their analysis by additionally implementing interest rates in their empirical model, as during the long observation period of 51 years interest levels varied significantly. The authors find out that by controlling for the interest rate the estimated tax effects are larger than in previous studies.26

There are also several papers that investigate corporate financial policy using data from non U.S.-countries. Rajan and Zingales (1995) analyze a multinational sample with different tax and accounting systems and test the effect of these regulations on the financing policy of corporations. First they conduct an analysis at aggregate level. Here results are similar to studies previously conducted for U.S.-data. He adds legal origin, differences in bankruptcy law, regulations on ownership and control as well as tax effects to his empirical model. The countries investigated show less differences with respect to their debt level than expected. Country-specific differences in the financial policy of corporations are not found.27

Shum (1996) and Alworth and Arachi (2000) find evidence for the impact of taxes on corporate capital structure with Canadian and Italian data sets.28 Wald (1999) expands the investigation of international debt financing by data for size, risk and turnover. He concludes that the most profitable corporations

23 See Graham (2000), p. 1901ff. 24 See Graham / Tucker (2006). 25 See Gordon / Lee (2001), p. 196ff. 26 See Gordon / Lee (2007), p. 65ff. 27 See Rajan / Zingales (1995), p. 1113ff. 28 See Shum (1996), p. 556ff. and Alworth / Arachi (2001), p. 353ff.

10 2 Capital Gains Taxation and Corporate Capital Structure have the lowest debt ratios.29 Gropp (2002) investigates a German sample of corporations and finds out that local taxes are a significant determinant of the capital structure choice of German corporations.30 Desai et al. (2004b) find significantly higher debt levels in Anglo-American countries compared to bank-orientated countries like Japan, Germany or France.31

Huizinga et al. (2008) investigate a European sample and show that multinational corporations within Europe have an incentive to borrow in high-tax countries.32 Buettner et al. (2006) investigate the impact of thin-capitalization rules on the debt policy of German multinationals. They find out that these regulations restrict the use of debt and thereby significantly reduce debt ratios.33 Pfaffermayr et al. (2009) analyze the relationship between capital structure, corporate taxation and firm age. They find a significant influence of the corporate tax rate on corporate financing and observe that older firms have smaller debt ratios as younger firms lack internal funds.34

Dwenger and Steiner (2009) construct a pseudo-panel using German corporate income tax return data. Their results show that a 10 % decrease of the statutory corporate tax rate would reduce corporate debt by 5 %.35 Buettner et al. (2009) show that taxes are a determinant of debt ﬁnancing of German multinationals. Additionally they ﬁnd that external and internal borrowing are substitutes depending on the local credit market conditions.36

In 2009, Frank and Goyal (2009) published their paper on factors that influence capital structure decisions. They review the existing theories and compare empirical contributions. By testing known determinants Frank and Goyal (2009) find factors which account for 27 % of the variation in market-based leverage. These factors are median industry leverage, market-to-book assets ratio, tan- gibility, profits, log of assets, inflation and the dividend policy. When looking at book debt the impact of size, the market-to-book ratio and the inflation are

29 See Wald (1999), p. 161ff. 30 See Gropp (2002), p. 51ff. 31 See Desai / Foley / Hines (2004), p. 2451ff. 32 See Huizinga / Laeven / Nicodème(2008), p. 1ff. 33 See Buettner / Overesch / Schreiber / Wamser (2006), p. 1ff. 34 See Pfaffermayr / Stöckl / Winner (2009), p. 1ff. 35 See Dwenger / Steiner (2009), p. 1ff. 36 See Buettner / Overesch / Schreiber / Wamser (2009), p. 309ff.

11 2 Capital Gains Taxation and Corporate Capital Structure not statistically signiﬁcant, all other factors remain. Taxation only seems to be a signiﬁcant factor when considering the determinats of book debt.37

Chang et al. (2009) use a structural equation modeling approach to find out which factors determine capital structure choice. Their results show that growth and profitability are the most important determinants of market-valued debt.38 The work of Börneret al. (2010) investigates the capital structure of small and medium-sized firms in Germany and finds out that size, age, ownership structure and profitability are the most important determinants.39

Gordon (2010) analyzes existing literature and empirical work on corporate capital structure choice. He argues that more emphasis should be laid on the ”lemons” model to explain existing debt levels of corporations. Gordon (2010) suggests that tax law can prevent misallocation on the loan market.40

Most of the work on the impact of taxation on corporate capital structure focuses on the tax rate at corporate level. But corporate proﬁts are not only taxed at corporate level but are taxed again at investor level. To implement all costs when comparing ﬁnancing decisions, taxes at individual investor level have to be implemented. Some of the articles mentioned above refer to the impact of individual taxation but do not explicitly go into detail of capital gains taxation.

There are only a few papers that draw attention to the impact of individual capital gains taxation on corporate financing decisions. Gordon and McKie- Mason (1990) investigate whether the Tax Reform Act (TRA) 1986 in the USA had an impact on the debt-ratio of corporations. The TRA 1986 reduced the maximum statutory tax rate on corporate level from 46 % to 40 % in 1987 and further to 34 % in 1988. Moreover, the fraction of capital gains that are taxable was increased from 40 % to 100 %. Gordon and McKie-Mason (1990) calculate e e e e e the net tax advantage of debt financing by τc + (1 − τc )τe − τi , where τc is the e effective marginal tax rate on corporate profits, τe the effective marginal tax e rate on income from equity and τi the tax rate of the marginal investor in debt. e e The tax rate on equity income is further decomposed to τe = dτi + (1 − d)gλt.

37 See Frank / Goyal (2009), p. 1ff. 38 See Chang / Lee / Lee (2009), p. 197ff. 39 See Börner/ Grichnik / Reize (2010), p. 227ff. 40 See Gordon (2010), p. 151ff.

12 2 Capital Gains Taxation and Corporate Capital Structure

The variable d is the dividend payout ratio of the corporation. The factor g represents the fraction of taxable capital gains. This leads to g = 0.4 before and g = 1 after the TRA 1986. Based on Feldstein and Summers (1979), Gordon and McKie-Mason (1990) use the term λ to account for the discounting effect in the capital gains tax rate. Feldstein and Summers (1979) state that the taxation upon realization as well as the possible deferral of the realization to the future each halve the effective tax rate on capital gains. Therefore the factor λ is calculated to be 0.25.41 The personal tax rate of the marginal investor holding taxable bonds is calculated to be 20.2 % in 1986, 19 % in 1987 and 15.5 % in 1988 using the approach of Poterba (1987).42 Gordon and MacKie-Mason calculate the net tax benefit of debt with the values obtained and show that debt became more attractive after the TRA 1986. They find out that capital gains taxation has an influence on corporate financial structure although the magnitude is not as high as expected.43

Also Givoly et al. (1992) investigate the impact of the changes in taxation due to the TRA 1986 on the capital structure of firms. They argue that corporations with higher marginal tax rates will show a higher reaction on the TRA 1986. Additionally, Givoly et al. (1992) consider the substitution hypothesis and develop a second hypothesis that firms that lose non-debt tax shield due to the TRA 1986 will increase their leverage more than firms that lose a smaller amount. Further, Givoly et al. (1992) include taxation at investor level and implement the reduction of the preferential treatment of capital gains. They state that firms with a high dividend yield (and therefore less accumulated capital gains) will increase their leverage less than growth firms with a low dividend yield. Givoly et al. (1992) test their hypotheses using a sample of U.S. firms over the years of 1984 to 1996. The authors run a cross-sectional regression using the change in the level of leverage as dependent variable. By using the approach of Scholes and Wolfson (1992)44 they calculate the effective tax rate used as explanatory tax variable. Further non-debt tax shield (depreciation, investment tax credit, loss carry-forwards) are integrated. The dividend yield is calculated as the weighted average of the dividends per

41 See Feldstein / Summers (1979), p. 450ﬀ. 42 See Poterba (1989). 43 See Gordon / MacKie-Mason (1990), p. 91ﬀ. 44 See Scholes / Wolfson (1992).

13 2 Capital Gains Taxation and Corporate Capital Structure share divided by the price per share. The size of the corporation, the business risk and the bankruptcy costs are implemented as control variables. The results show that the effective tax rate has a significant impact on the financial policy of a firm. The authors also find support for the second hypothesis that other non-debt tax shields have an effect on the leverage of a corporation. Finally, the estimation shows a significant and negative sign of the dividend yield, which suggests that personal taxes are a determinant of capital structure.45

Schulman et al. (1996) hypothesize that the tax reform in 1972 in Canada had an impact on the capital structure of Canadian companies. With the tax reform in 1972 the imputation credit method and a capital gains taxation were introduced. While the imputation system induced the debt level of corporations to fall, the capital gains tax stimulated the companies to lever up. They point out that the magnitude of the impact of the imputation method and capital gains taxation depends on the type of return to the investor. Corpora- tions, who are growth firms and offer significant returns to shareholders in the form of stock appreciation are most likely to react on capital gains taxation. By estimating a pooled time-series cross-sectional regression, Schulman et al. (1996) find out, that the leverage decreased after the TRA 1972 in Canada. This suggests that the effect of the imputation credit method overlaid the effect of the capital gains taxation. There was no significant decrease at corporations with high loss carry-forwards. This again supports the substitution hypothesis.46

Graham (1999) also tests whether taxes, including capital gains taxation, have a significant impact on corporate capital structure. He bases his model on the paper of Gordon and MacKie-Mason (1990) but replaces micro-data control variables with firm-specific data. In this paper, Graham (1999) focuses on the impact of personal taxation on the capital structure. Following Graham et al. (1998) he uses the taxable income before financing to calculate the marginal tax rate.47 Graham (1999) runs several regression analysis with different definitions of debt including changes in debt. He finds a significant relationship between the tax rate including individual capital gains taxation and the corporate debt level. Regarding the tax reform act of 1997 in the USA, where the

45 See Givoly / Hayn / Ofer / Sarig (1992), p. 334ff. 46 See Schulman / Thomas / Sellers / Kennedy (1996), p. 31ff. 47 See Graham / Lemmon / Schallheim (1998), p. 131ff.

14 2 Capital Gains Taxation and Corporate Capital Structure capital gains tax rate was lowered from 28 % to 20 %, while corporate taxation remained stable, debt ratios of corporations were decreasing.48

Campello (2001) tests whether individual taxation is a determinant of the capital structure of corporations. Also Campello (2001) investigates the impact of the TRA 1986 on the financial policy of companies. He hypothesizes that firms that do not pay dividends and therefore accumulate capital gains will increase their leverage more than companies that pay high dividends. This hypothesis is tested by an OLS-regression. His results show that companies which pay no dividends decide for 4.7 % more debt financing than an average corporation.49

Dhaliwal et al. (2007) investigate the impact of tax reform acts from 1997 to 2003 in the U.S., where several changes in taxation of capital gains, dividends and interest payments took place. The TRA 1997 reduced the tax rate on capital gains from 28 % to 20 % and the rate was further reduced to 15 % in 2003. The authors develop the hypothesis that the impact of the capital gains taxation on the probability to issue debt versus equity depends on the dividend policy of a corporation. Additionally, Dhaliwal et al. (2007) state that the impact of capital gains taxation depends on the number of outstanding stock held by institutional owners. Compared to other papers, Dhaliwal et al. (2007) offer a new approach by examining the issues of debt and equity around tax reforms. Their dependent variable is a binary variable, which is 1 if a firm issues debt and 0 otherwise. By using a probit model the authors find out that after the tax reform act 1997 the probability to issue debt versus equity decreased by 13.8 % after the TRA 1997 and decreased again by 8.1 % after the TRA 2003. Additionally they find support for their hypothesis that the dividend policy has a significant impact on the probability to issue debt versus equity. Dhaliwal et al. (2007) did not find support for the hypothesis that the fraction of institutional owners affects the probability.50

Overesch and Voeller (2010) investigate the tax effects including investor taxes on capital structure choices using a data set from 23 European countries, which offers sufficient variation in tax variables for an empirical analysis. The authors

48 See Graham (1999), p. 147ff. 49 See Campello (2001), p. 1ff. 50 See Dhaliwal / Erickson / Krull (2007), p. 6ff.

15 2 Capital Gains Taxation and Corporate Capital Structure calculate effective tax rates in Europe by including taxation at investor level. Additionally, they separately collect effective tax rates on capital gains for the countries in their sample. Overesch and Voeller (2010) run several regressions controlling for different impacts of taxation. The results show the expected sign and a significant impact of the net tax benefit of debt including individual taxation on the use of debt of corporations. When including the tax rate on capital gains, no significant impact of capital gains taxation can be found.51

2.1.2 Agency Theory and Corporate Capital Structure

Regarding the impact of agency costs on the choice of external financing, the free cash flow theory and the pecking order theory are the main theories in the scientific literature.

The free cash flow theory is based on a moral hazard problem, which results from information asymmetries between the management and the shareholders of a corporation.52 According to Jensen (1986) debt is a means of disciplining managers as less monitoring is necessary. Interest payments serve as a substitute for dividends and if managers lead the firm into bankruptcy, investors in debt can go to court. Therefore agency costs are smaller for debt than equity.53 This can also be seen as the reason for some managers to avoid debt.54 Zwiebel (1986) tries to explain why some managers still issue debt instead of equity. He argues that managers try to control themselves by issuing debt to assure an efficient management of the company, which shall protect the firm against possible take-overs.55

The pecking order theory explains the capital structure of a corporation by the theoretical foundation of adverse selection.56 Myers and Majluf (1984) state that investors value the choice between ﬁnancing by equity or by debt. As investors are usually less informed than managers, they might value the issue of equity as a possible sign that the shares are overvalued. A share price

51 See Overesch / Voeller (2010), p. 1ﬀ. 52 See Weichenrieder (2007). 53 See Jensen (1986). 54 See Myers (2001). 55 See Zwiebel (1996). 56 See Weichenrieder (2007).

16 2 Capital Gains Taxation and Corporate Capital Structure reaction downward is supported by several studies.57 This reaction might be anticipated by the managers, who may give up attractive new investment opportunities just not to give the wrong signal to the investors. When issuing debt to finance new projects, the impact on the share price is smaller, because the issue of debt causes less information asymmetry between the managers and the investors.58 These considerations lead to the pecking order theory of capital structure: firms first try to finance their projects by retained earnings. If external financing is needed, debt is preferred over equity and the debt ratio of a corporation reflects the cumulative requirement for external financing. Myers (2001) investigates leverage of corporations and states that the current debt ratios are better explained by the pecking order theory than by the trade- off theory.59

57 See, e.g., Barclay / Litzenberger (1988). 58 See Myers / Majluf (1984). 59 See Myers (2001), p. 92ﬀ.

17 2 Capital Gains Taxation and Corporate Capital Structure

2.2 Capital Gains Taxation and Corporate Capital Structure in Austria

2.2.1 Institutional Background

In Austria, capital gains from the disposal of shareholdings were tax-exempt until 2011 if they fulfilled the following conditions: the shares had to be held for at least one year and the holding must have been below the threshold for substantial shareholdings of 1 % in the last five years. If a share was sold within one year after acquisition the capital gain is treated as income from speculation and is taxed at the ordinary tax rate of the Austrian tax schedule. If a sold holding exceeded the threshold for substantial shareholdings the capital gain was taxed at the half of the average individual tax rate using the Austrian tax schedule. Capital losses can only be offset against capital gain realizations of the same tax period.

The threshold for substantial shareholdings was lowered twice during the last 25 years. In 1988 this threshold was reduced from 25 % to 10 % in line with the introduction of the revised income tax code of 1988. In 2001, the taxreform lowered the threshold again from 10 % to 1 %. An interim arrangement determines that for shares below the 10%-threshold, that have been aquired before 1998, the capital gain can be calculated using the fair market value of the share of the ﬁrst of January 2001, see § 124b No. 57 EStG.

In Austria - as well as in many other countries - the deductibility of interest payments from debt on company level causes a beneficial treatment of debt financing compared to equity financing. If individual taxes are also taken into account, this tax advantage can change depending on the tax rates on interest and dividend payments.

Income from interest as well as from dividends received are taxed at a ﬂat withholding rate of 25 %. This withholding tax was introduced in Austria in 1993, the statutory ﬂat tax rate of 25 % is unchanged since 1996.60 For realized capital gains exceeding the threshold for substantial holdings of 1 %,

60 See Austrian Federal Oﬃcial Journal, BGBl 2001/1996.

18 2 Capital Gains Taxation and Corporate Capital Structure it is assumed that the investor is taxed at the top statutory tax rate of 50% and therefore faces a statutory tax rate on capital gains (τg) of 25 %.

2.2.2 Hypotheses Development

For developing the hypotheses on corporate financing decisions in Austria, I focus on individual shareholders who are Austrian residents and are subject to the top marginal income tax rate of 50 %. I therefore assume that realized capital gains exceeding the threshold for substantial shareholdings of 1 % are taxed at a statutory tax rate (τg) of 25 %. However, capital gains are taxed only upon realization whilst dividends are taxed on an annual basis. The discounting effect leads to a lower effective taxation of capital gains.

Looking at the literature on the cost of capital and the recent discussion of the Tax-CAPM in Germany it can be found that Wiese (2007) calculates an eﬀective capital gains tax rate based on the accrual-equivalent capital gains tax rate of Auerbach (1983), which is dependent on the holding period T as well as the growth rate r of the underlying asset:61

T 1 ((1 − τ )[(1 + r) − 1] + 1) T − 1 τ e = 1 − g . (2.1) g r

This approach is used to calculate the eﬀective capital gains tax rate in the empirical analysis in section 2.2.4.

Gordon and MacKie-Mason (1990) oﬀer a model of the impact of taxes on corporate ﬁnancing decisions explicitly referring to the tax rate on investor capital gains:

If a ﬁrm adds an extra Euro of debt its investor receives (1 − τi), where τi is the tax rate on interest payments. If a company decides to ﬁnance by extra equity, an investor receives (1 − τc)(1 − τe), where τc is the corporate tax rate and τe is the tax rate on income from equity. Income from equity can either be dividends or capital gains. Graham (1999) decomposes τe into

τe = [d + (1 − d)gλ]τi. (2.2)

61 See Auerbach (1983), p. 905ﬀ. and Wiese (2007), p. 368ﬀ.

19 2 Capital Gains Taxation and Corporate Capital Structure

In this equation d is the dividend payout ratio, g is the proportion of long- term gains that are taxable and λ represents the beneﬁt from deferring capital gains.62

Following Gordon and MacKie-Mason (1990) and Graham (1999) and adjust- ing for the Austrian Tax Law one can state that

e τe = dτd + (1 − d)sτg , (2.3)

where τd is the tax rate on dividends and the variable s represents the fraction of taxable Austrian investors and captures the eﬀect that before 2001 only capital gains over a 10%-shareholding are taxed, whilst since 2001 also capital gains from a 1 % on shareholding are taxed. By transposing the equation above 63 one gets the advantage of debt versus equity (GL):

e GL = (1 − τi) − (1 − τc)(1 − (dτd + (1 − d)sτg )). (2.4)

As an example, the payout ratio d and the fraction of taxable individual investors s are assumed to be 0.5 and the effective tax rate on capital gains e is τg =12.5 %. The tax rate on income from equity is calculated by τe = e dτd +(1−d)sτg . Using these assumptions an investor faces a combined taxation on equity income of 36.72 % compared to the 25 % tax rate on income from interest payments. The tax advantage of debt versus equity therefore amounts to 11.72 %. This advantage increases if the effective tax rate on capital gains increases. Additionally, the advantage is affected by the payout ratio and the fraction of taxable private investors. Formally, it is easy to show that ∂GL > 0, ∂τe ∂GL ∂GL ∂s > 0, and ∂d > 0. From these partial derivatives the following hypotheses can be immediately derived: Hypothesis 1: Increasing (decreasing) individual taxation of income from equity increases (decreases) debt financing.

Hypothesis 2: The higher (lower) the threshold for tax-exempt capital gains and thus the higher (lower) the fraction of taxable indi-

62 See Gordon / MacKie-Mason (1990) and Graham (1999). 63 I do not take speculation taxes into account as I assume that in the sample only a negligible minority of shares is held for speculation purposes.

20 2 Capital Gains Taxation and Corporate Capital Structure vidual investors g, the higher (lower) the tax advantage of debt.

Hypothesis 3: The magnitude of the eﬀect of capital gains taxation depends on d, the dividend payout ratio of a company.

As dividends are taxed at a flat tax rate of 25 % and the effective capital gains tax rate will be below the tax rate for dividends due to the discounting effect, a higher dividend payout ratio d should lead to higher debt financing of Austrian corporations.

2.2.3 Data and Summary Statistics

I use the Amadeus and the Osiris Database from Bureau van Dijk to create the sample. These databases offer firm-level data of Austrian companies, containing information such as financial reporting data and ownership information.

Hitherto, most empirical research is based on U.S. data. Little research on capital gains taxation is done in Europe and almost none in Austria. U.S. corporations diﬀer from companies in Europe not only regarding access to capital and bond markets, but also with respect to the distribution over legal forms. To gain speciﬁc results for Austria an investigation of a data set from Austria is essential.

Most of the studies investigate aggregate data or data from listed companies. By contrast, a large part of non-listed corporations is included in this sample where it is possible to get firm-specific data. This generates new information on the behavior of corporations of different sizes and legal status. This is especially important as a predominant part of companies in Austria is family- dominated and not listed.

As the tax reform observed was established in January 2001 an observation period from 1999 to 2004 is chosen. The investigation period is cut before 2005 due to the fact that a major corporate tax reform took place in 2005 where several tax changes occurred which would distort the investigation of the research question.

The Amadeus Database for 2001 has data for 31,773 Austrian corporations containing 1,104 public and 30,669 private limited companies. To gain the

21 2 Capital Gains Taxation and Corporate Capital Structure sample, all corporations from Austria available in the Amadeus and Osiris Databases, where information about shareholders and ﬁnancial reporting data is present, are extracted. This reduces the sample to 259 companies.

Then all corporations are eliminated for which no shareholdings between 1 % and 9.99 % are recorded. The remaining corporations are the ones which would potentially face higher cost of equity by the implementation of an additional capital gains taxation. For the corporations included all relevant data from 1999 to 2004 is collected.

The years from 1999 to 2002 are not covered consistently by the Amadeus Database for all corporations. This may be due to the fact that a large part of non-listed corporations is included, for which relevant data is not publicly available. Additionally, I obtain several ﬁnancial reporting data by searching of documents from the Austrian Commercial Register for corporations which are covered in the databases but have single missing data items. Finally, the sample amounts to 514 observations from 99 corporations.

Due to the fact that information is usually better available for larger ﬁrms, the sample contains mostly large companies, measured by the classiﬁcation of corporation size of the Austrian Commercial Law (§ 221 Unternehmensgeset- zbuch (UGB)).64 As not all data for all corporations in the sample is available for all considered years, total assets of the last year available are used.

Size (Total Assets) Freq.

Small Corporations 2 Medium Corporations 39 Large Corporations 58 Total 99

Table 2.1: Size of Corporations in the Sample

64 I take the values for total assets of § 221 UGB: Up to total assets of 4.84 Million Euros it is considered to be a small corporation. Medium corporations have total assets between 4.84 and 19.25 and large corporations above 19.25 Million Euros.

22 2 Capital Gains Taxation and Corporate Capital Structure

As mentioned above, a large part of non-listed Austrian corporations is included in the sample. This is particularly important for an investigation of Austrian corporations as the majority of corporations is not quoted and most of them are organized in the legal form of a private limited company (GmbH). The stock market in Austria is rather small and only the minority of corporations is operated under the legal form of public limited corporations (AG). This is reﬂected by the composition of the sample.

Legal Form Freq. % Stock Market Freq. %

AG 12 12.12% Listed 5 5.05% GmbH 87 87.88% Non-Listed 94 94.95% Total 99 100% Total 99 100%

Table 2.2: Legal Form and Listing of Corporations in the Sample

Table 2.2 shows that 87.88 % of the considered corporations are private limited corporations, 12.12 % of the companies in the sample are public limited corporations, but only 5.05 % of the contemplated ﬁrms are listed at the Austrian stock exchange. This reﬂects the typical situation in Austria.

I use the ONACE-Code¨ 65 to classify the corporations by their ﬁeld of business.

Table 2.3 summarizes the industry composition of the sample. Nearly 75 % of the considered companies are from the two industries Real Assets Industry and Production and Construction. Firms from the industry of Mining, Accomoda- tion and Restaurant as well as from the industry of Realties and Banking and Insurance are missing in the sample. Corporations in the industry of Banking and Insurance are not captured by the Amadeus-Database and therefore only listed ﬁnancial institutions captured by the database Osiris are considered, here none of the companies fulﬁlls the conditions.66

65 Which is based on the NACE 1.1-Code. 66 For the distribution of companies over industries in Austria see Statistik Austria (2007).

23 2 Capital Gains Taxation and Corporate Capital Structure

Industry Freq. %

Real Assets Industry and Production 42 42.43% Energy and Water Supply 4 4.04% Construction 31 31.31% Trade; Maintenance and Repair of Motor Vehicles and Durables 10 10.10% Traﬃc and Telecommunication 9 9.09% Realties and Business Services 3 3.03% Total 99 100%

Table 2.3: Industry of Corporations in the Sample

To be able to investigate the impact of capital gains taxation on debt policy in Austria, debt ﬁnancing of corporations is measured by the book debt to total assets ratio (DebtRatio). Book debt is calculated as the sum of current and non-current liabilities in Amadeus or the ﬁnancial reports of the Austrian Commercial register respectively.

As described in section 2.2.2, I expect the debt ratio to rise with a higher e e eﬀective tax rate on capital gains τg . The variable τg is calculated using the approach explained in section 2.2.2:

T 1 ((1 − τ )[(1 + r) − 1] + 1) T − 1 τ e = 1 − g . (2.5) g r

To obtain the growth rate r I use the index of the Vienna stock exchange (Wiener BörseIndex, WBI) and calculate an average rate of return for the observation period. The holding period is specified to calculate the effective tax rate on capital gains by using statistics on stock market turnover for every year included in the study.67 With these two parameters it is possible to calculate an effective tax rate on capital gains for every considered year.68

To measure the fraction of taxable shareholdings before and after the Austrian

67 See World Federation of Exchanges (1999-2004). 68 The robustness checks in section 2.2.4.3 show that the results of the inﬂuence of the tax rate are robust to several changes in the growth rate and the holding period.

24 2 Capital Gains Taxation and Corporate Capital Structure tax reform of 2001 the variable s is included. The factor s captures the percentage of investors with taxable shareholdings. Until 2000, all shareholdings above and equal 10 % were taxable, starting with 2001 the threshold was lowered to 1%-holdings. If an investor for example held 9 % of a corporation in 2000, capital gains from selling this holding were tax-exempt. If an investor had the same holding in 2002, a realization of capital gains was taxable.

Table 2.4 and ﬁgure 1 show the mean values of the corporations’ debt ratio, the individual tax rate per company, τg, and the fraction of taxable investors per corporation, s.

e year Debtratio τg s 1999 0.70727913 0.23287505 0.48655333 2000 0.69832529 0.23034203 0.47421765 2001 0.68712353 0.22446193 0.47637284 2002 0.67119871 0.21332645 0.430725 2003 0.65561484 0.22022502 0.46406429 2004 0.6596761 0.2307547 0.43800778 Total 0.6799474 0.22549706 0.46160992

e Table 2.4: Mean Values of Debtratio, τg and g from 1999 to 2004

e Figure 1: Mean Values of the Variables Debtratio, τg and s from 1999 to 2004

25 2 Capital Gains Taxation and Corporate Capital Structure

Figure 1 shows that, contrary to expectations, the average debt level decreased after the tax reform of 2001. During the observation period, the debt ratio of Austrian companies dropped from 70.73 % to 65.56 % in 2003. In the year 2004 one can observe a moderate rise to an average debt ratio of 65.97 %.

e When looking at τg , one can see that the eﬀective tax rate on capital gains for investors dropped from 23.03 % in 2000 to 22.45 % after the tax reform 2001. This is against the predictions, but could be caused by a longer holding period due to the additional tax imposed on realized capital gains.

Also the factor s is decreasing against the predictions. In the year 1999 the average percentage of taxable individual shareholders was 48.65 %. As the threshold for taxable capital gains was lowered in 2001 one would expect s to rise, but it dropped to 43.07 % in 2002. This trend downwards could be caused by investors selling their shares of companies or reorganizing their holdings in their families due to the abolishment of the tax exemptions of capital gains for holdings under the 10%-threshold.69

Although the summary statistics show a decrease in debt ratios, this surprising result still indicates a possible influence of investor capital gains taxation on e corporate financing as the debt ratio moves towards the same direction as τg . Individual investors might have anticipated future taxation and reorganized investments to lower their tax burden although capital gains taxation was e raised. As a lower τg also lowers the beneficial treatment of debt, debt ratios might have dropped as observed.

2.2.4 Regression Analyses

2.2.4.1 Regression Model

The sample is designed for a cross-section analysis using an OLS-estimation. Due to the fact that it was not possible to track all the corporations throughout every year of the observation period of 1999 to 2004 a dataset suitable for a compact panel analysis could not be created as this would lead to a very small sample size.

69 Note that the tax reform became eﬀective in 2001, but ﬁrst press articles about the tax reform 2001 were published in February 2000. The law was approved by the Austrian Parliament on 14. December 2000.

26 2 Capital Gains Taxation and Corporate Capital Structure

This analysis investigates the effects of individual capital gains taxation on the debt ratio of Austrian corporations. The dependent variable DebtRatio is defined by the ratio of book debt to total assets, which is gained from the Amadeus-Database or the financial statements of the Austrian commercial register. To run the regressions, tax variables as well as control variables as explanatory variables are used.

To see whether capital gains taxation at individual level influences the debt e level of corporations τg is included, measured as stated in equation 2.1, in the regression model. The variable s will be included to see whether the fraction of taxable shareholders affects a corporation’s debt level. According e to hypotheses 1 and 2 one expects the coefficients of τg and s to be positive. It should be controlled for changes in other taxes that influence the capital structure of corporations. As the tax rate at corporate level (τc), the tax rate on interest (τi) and the tax rate on dividend payments (τd) were constant over the observation period, these variables are not included in the regression analysis.

The factor d is the dividend payout ratio of a corporation of a certain year. As there are mainly non-listed corporations in the sample and therefore one cannot observe payouts directly, payouts are calculated by using the profit of a period and subtracting the change in shareholder funds. Deflating by the corporation’s profit of the considered year a firm-specific payout ratio for each year and each corporation is obtained. As explained in section 2.2.2, dividends are usually taxed at a higher tax rate than capital gains due to the discounting effect. In accordance with hypothesis 3, a higher dividend payout ratio d should therefore lead to higher debt financing of Austrian corporations.

The variable Depr is implemented to control for other possible tax-shields than interest payments (substitution hypothesis). The higher depreciation items the less tax-shields from interest payments are necessary to lower taxable income. It is therefore expected that this variable will be negative. To control for deductible loss carry-forwards, the dummy variable NOL is included as a proxy, which is set 1 if there is a loss in the year before the year considered and 0 otherwise. This can only be a proxy for the loss carry-forward for tax purposes as only the data on the proﬁt or loss in terms of commercial law are

27 2 Capital Gains Taxation and Corporate Capital Structure available and loss carry-forwards for tax purposes cannot be observed.70

The profit or loss of the considered year of a corporation is added as a control variable to see whether more profitable firms have less debt, as stated by Wald (1999).71 A profit to asset ratio is calculated by deflating by total assets lagged by one year.

According to Scott (1977)72 tangible assets are included in the regression model. The variable T anAss is expected to be positive as the costs of ﬁ- nancial distress are assumed to be lower the higher the tangible assets are as they serve as collateral.

To see whether the amount of current assets has an impact on the debt level of corporations the variable CurAss is added. To see if the capital structure of corporations varies with the size of the company the natural logarithm of sales is included in the regression analysis.

Additionally, it is investigated whether the legal status or the listing of corporations has a significant influence on the debt financing of corporations. Therefore the variables Legal and Quoted are included. These are both dummy variables, where Legal is 1 if the company is a public limited corporation (AG) and 0 if it is a private limited corporation (GmbH). The variable Quoted is set 1 if the regarded corporation is listed on the Austrian capital market and 0 otherwise.

To see whether the general development of the market had an inﬂuence on the debt level of corporations during the years observed the variable WBI is added, which is the percentage of annual change of the index of the Vienna stock exchange.

As a lot of corporations in Austria are family-dominated it is controlled for family-owned corporations by including the dummy F amily in the speciﬁca- tion. The dummy will be 1 if 50 % or more of a corporation in the sample are owned by family members and 0 otherwise.73

70 See for example Overesch / Voeller (2010) and Pfaffermayr / Stöckl / Winner (2009). 71 See Wald (1999), p. 161ff. 72 See Scott (1977), p. 33ff. 73 Family members are identified by their last name. Of course, this approach is only an approximation since other measures of family membership are not available.

28 2 Capital Gains Taxation and Corporate Capital Structure

To control for size eﬀects in the explanatory variables the variables T anAss, Depr and CurrAss are deﬂated by total assets.

The basic economic speciﬁcation reads:

DebtRatio = α + β τ e + β g + β d + β T anAss + β Depr + β Nol j,t 1 g t 2 j,t 3 j,t 4 j,t 5 j,t 6 j,t

+β7P rofitj,t + β8CurrAssj,t + β9lnSalesj,t + β10Legalj,t

+β11Quotedj,t + β12F amilyj,t + β13WBIt + j,t. (2.6)

2.2.4.2 Regression Results

To investigate whether the financial structure of corporations is influenced by individual capital gains taxation, specification 2.6 is used to run the regression for the data set of 514 observations of Austrian companies. For the period from 1999 to 2004 the estimation results are depicted in table 2.5.

e The coefficient for τg is significant at a 5%-level and positive indicating that higher effective individual capital gains taxation increases the debt level of Austrian corporations. This supports the first hypothesis derived in section 2.2.2. The impact is substantial as the results show that a 1 % increase in the effective capital gains tax rate would lead to a 2.83 % increase in the debt-to- asset ratio of a company.

The factor capturing the fraction of taxable individual shareholders, s, is also signiﬁcant and positive, though the impact is low indicating that a 1 % increase in the fraction of taxable individual shareholders would lead to a 0.04 % increase in a corporations’ debt level. Still, this is in accordance with the second hypothesis.

The factor d, the dividend payout ratio, shows a signiﬁcant and positive co- eﬃcient. This supports the third hypothesis indicating that the higher the dividend payout ratio, the higher the debt level of corporations.

The first variable testing for the substitution hypotheses, Depr, does not show a significant coefficient whereas the coefficient Nol is significant, but has the wrong sign. Therefore, a support for the substitution hypothesis cannot be found.

Results show a significant negative coefficient for the impact of the profitability (P rofit) on the capital structure of a corporation supporting the hypothesis

29 2 Capital Gains Taxation and Corporate Capital Structure

Variable Coeﬃcient (Std. Err.)

e ∗∗ τg 2.836 (1.330) s 0.040∗ (0.024) d 0.001∗∗∗ (0.000) Depr 0.266 (0.233) Nol 0.125∗∗∗ (0.025) P rofit –1.080∗∗∗ (0.119) T anAss –0.015 (0.020) CurAss 0.053∗∗∗ (0.011) lnSales 0.016∗∗ (0.007) Legal –0.136∗∗∗ (0.032) Quoted –0.115∗∗ (0.047) F amily –0.065∗∗∗ (0.022) WBI –0.056 (0.046) Intercept –0.216 (0.322)

N 514 R2 0.299

F (13,500) 16.374

Signiﬁcance levels : ∗ : 10% ∗∗ : 5% ∗ ∗ ∗ : 1%

Table 2.5: Estimation Results for Specification 1.1 that more profitable firms have less debt.

The coefficient of the variable lnSales, testing for an effect of firm size on capital structure, is positive and significant. This indicates that bigger firms tend to have more debt possibly due to better access to bank loans.

Table 2.5 shows negative and signiﬁcant results for the variables Legal and Quoted. The coeﬃcients imply that quoted companies with the legal form of a public limited corporation have a lower debt ratio than private limited companies which are not listed on capital markets. This might be due to the

30 2 Capital Gains Taxation and Corporate Capital Structure fact that listed corporations have better access to equity capital via capital markets than non-listed companies.

The dummy variable testing for the influence of family-owned corporations (F amily) is significant, which shows that family-dominated companies have a different financing policy than widely held firms. This is an important result as it shows that research with European data integrating family firms changes the achieved results.

I test for multicollinearity in the specification by looking at the correlations between the explanatory variables in table A.1.74 The highest correlation occurs between the fraction of taxable private shareholders, s, and the dummy variable F amily and amounts to 0.506. This suggests that family-owned corporations have more individual shareholders, which is intuitive to the definition of family-owned corporations. As none of the correlations is above +0.7 or below –0.7 the problem of multicollinearity in the first specification can be excluded.

To account for possible heteroscedasticity I run a regression with robust standard errors. Results for the coeﬃcients remain unchanged.

Summarizing the ﬁrst estimation the null hypotheses that the model has no explanatory power can be rejected at a 0.1%-level. With an R2 of 29.9 % the model explains nearly 30 % of the variations in debt ratio by the model, which is a satisfying result.

To find out whether financing behavior varies for different industries a second specification is estimated including the variable Ind, which is a vector of industry dummy variables set 1 for the corresponding industries C-K of the ONACE-Code.¨ Regression results are depicted in table 2.6.

The results show that there are differences in the capital structure of different industries. The industry of Traffic and Telecommunication borrows significantly less than corporations in the industry of Energy and Water Supply and the industry of Construction. The results of the other tested coefficients remain mainly the same.

Again it is tested for multicollinearity by looking at the cross-correlation table

74 See table A.1 in the Appendix.

31 2 Capital Gains Taxation and Corporate Capital Structure

Variable Coeﬃcient (Std. Err.)

∗∗ τg 2.877 (1.279) s 0.032 (0.024) d 0.001∗∗∗ (0.000) Depr 0.263 (0.225) Nol 0.123∗∗∗ (0.024) P rofit –1.085∗∗∗ (0.115) T anAss 0.026 (0.020) CurAss 0.042∗∗∗ (0.011) lnSales 0.016∗∗ (0.007) Legal –0.078∗∗ (0.032) Quoted –0.088∗ (0.046) F amily –0.064∗∗∗ (0.021) WBI –0.062 (0.045)

∗ Inde 0.084 (0.043) ∗∗ Indf 0.049 (0.021)

Indg 0.034 (0.041) ∗∗∗ Indi –0.176 (0.033)

Indk 0.107 (0.092) Intercept –0.249 (0.311)

N 514 R2 0.363

F (19,494) 14.806

Signiﬁcance levels : ∗ : 10% ∗∗ : 5% ∗ ∗ ∗ : 1%

Table 2.6: Estimation Results for Speciﬁcation 1.2 and multicollinearity can be rejected as no high correlations between explana-

32 2 Capital Gains Taxation and Corporate Capital Structure tory variables can be detected.75

Additionally, possible heteroscedasticity is addressed by estimating the speci- ﬁcation with robust standard errors and results remain unchanged.

Using an F-test for the goodness of ﬁt of the model the null hypothesis of no explanatory power of the model at a 1%-level can be rejected.

Altogether, I find support for all of the three hypotheses and detect significant influence of individual capital gains taxation on the debt level of corporations.

2.2.4.3 Robustness Checks

To see if the results are robust with respect to changes of the variables’ speci- ﬁcation a sensitivity analysis is conducted.

e To see if different calculations of the tax variable τg change the estimated results, four different calculations of the effective tax rate on capital gains are applied.

In addition to the first definition of the effective capital gains tax rate, now denoted τ e , the estimation of the growth rate used to calculate τ e is changed g 1 g 2 to the average rate of return of bonds76 instead of the index of the Vienna Stock Exchange. Further I calculate τ e by using the average rate of return of g 3 the Austrian Traded Index (ATX). As family-owned corporations might hold their shares longer than the average investor at the Vienna Stock Exchange, the holding period calculated by the WFE is lengthened by five years and τ e g 4 e is calculated. Table 2.7 shows the results of the different calculations of τg . The effective capital gains tax rates are the highest when calculated with the average rate of return for Austrian bonds (τ e ). This is due to the lower g 2 rate of return achievable by bonds compared to shares of the Vienna Stock Exchange. Still this might be a reasonable variation as shares from non-listed, small corporations might not face the same profitability as listed corporations. The lowest tax burden on capital gains occurs if the holding period is extended (τ e ), as the tax payment is deferred further to the future. g 4

75 See table A.2 in the Appendix. 76 See Austrian National Bank (2011).

33 2 Capital Gains Taxation and Corporate Capital Structure

(1) τ e (2)τ e (3) τ e (4) τ e g 1 g 2 g 3 g 4 1999 0.23288 0.24381 0.23095 0.18813 2000 0.23034 0.24086 0.22815 0.18612 2001 0.22446 0.23951 0.22166 0.18148 2002 0.21333 0.23542 0.20944 0.17276 2003 0.22023 0.24085 0.21700 0.17816 2004 0.23075 0.24418 0.22861 0.18645

Table 2.7: Eﬀective Tax Rates on Capital Gains

To see how the different calculations affect the estimation results, the same regression as described in table 2.5 is performed and the estimated coefficients are compared.

As table 2.8 shows the general results are robust to the different calculations e of the effective tax rate on capital gains. The second calculation of τg using the average rate of return on bonds show a larger effect than the other three calculations. Further, one cannot see a significant influence of s, the fraction of taxable individual investors. In general, the sign and the significance of the coefficient of the tax rate – and therefore the interpretation of a causal impact of capital gains taxation on debt financing – remain the same.

e Also for the other definitions of τg the cross-correlation tables are inspected and multicollinearity in the specification can be rejected.77 To account for heteroscedasticity the specification is estimated with robust standard errors, results for all coefficients remain the same.

The results support all three hypotheses derived in section 2.2.2. One can see from the specification results that capital gains taxation influences the debt level of Austrian corporations. Additionally, the fraction of taxable investors of a corporation and its dividend payout ratio affect the corporate capital structure.

77 Cross-correlations are shown in tables A.3 – A.5 in the Appendix. I additionally compute variance inﬂation factors. None of the values is above 2.

34 2 Capital Gains Taxation and Corporate Capital Structure

Variable (1) (2) (3) (4)

∗∗ ∗∗ ∗∗ ∗∗ τg 2.836 7.765 2.578 3.612 s 0.040∗ 0.040 0.040∗ 0.040∗ d 0.001∗∗∗ 0.001∗∗∗ 0.001∗∗∗ 0.001∗∗∗ Depr 0.266 0.269 0.266 0.266 Nol 0.125∗∗∗ 0.124∗∗∗ 0.125∗∗∗ 0.125∗∗∗ P rofit -1.080∗∗∗ -1.081∗∗∗ -1.080∗∗∗ -1.080∗∗∗ T anAss –0.015 –0.015 –0.015 –0.015 CurAss 0.053∗∗∗ 0.052∗∗∗ 0.053∗∗∗ 0.053∗∗∗ lnSales 0.016∗∗ 0.016∗∗ 0.016∗∗ 0.016∗∗ Legal –0.136∗∗∗ –0.136∗∗∗ –0.136∗∗∗ –0.136∗∗∗ Quoted –0.115∗∗ –0.115∗∗ –0.115∗∗ –0.115∗∗ F amily –0.065∗∗∗ –0.065∗∗∗ –0.065∗∗∗ –0.065∗∗∗ WBI –0.056 -0.103∗ –0.056 –0.056 Intercept –0.151 –1.440∗ –0.151 –0,235

N 514 514 514 514 R2 0.299 0.299 0.299 0.299

F (13,500) 16.374 16.400 16.370 16.370

Signiﬁcance levels : ∗ : 10% ∗∗ : 5% ∗ ∗ ∗ : 1%

Table 2.8: Estimation Results for Diﬀerent Deﬁnitions e of τg

2.2.5 Intermediate Summary

The ﬁrst analysis investigates the impact of the tax reform 2001 in Austria, which reduced the threshold for substantial holdings from 10 % to 1 %, on debt ratios of Austrian corporations. This investigation diﬀers from prior studies by using a unique data set including non-listed corporations, as this is the majority of corporations in Austria. This allows to make more generalized statements on the reaction of corporations on the tax reform of 2001.

35 2 Capital Gains Taxation and Corporate Capital Structure

Against the predictions debt ratios did not rise after the increased capital gains taxation in 2001. Also the fraction of taxable individual investors and the effective tax rate on capital gains decreased after 2001. I find a significant and positive relationship between the effective tax rate on capital gains and the debt ratio of Austrian corporations. Also the fraction of taxable individual investors has a positive and significant coefficient. Additionally, results show that a higher dividend payout ratio increases the debt ratio. These results support the hypotheses.

To find further support for an impact of individual capital gains taxation on the financing policy of corporations, a cross-country analysis is conducted in chapter 2.3. I expect that corporations in countries, that show a higher net tax benefit of debt, have higher debt ratios. As countries in CEE offer various tax rate changes in the last decade, I will investigate 13 countries of this region to assess this problem.

Although significant influence of the tested variables in the investigation of Austrian corporations can be found, it seems somewhat surprising that the fraction of taxable individual investors has decreased after 2001 although the tax reform lowered the threshold for taxable capital gains implying an extended capital gains taxation. This counterintuitive result suggests further examination of the behavior of investors around the tax reform 2001. Investors might have anticipated the lower threshold and reorganized their shareholdings to avoid future taxation before the reform became effective. Due to the first results, I will investigate the impact of capital gains taxation on corporate ownership in chapter 3. These results could be important indicators for the tax sensitivity of individual investors.

36 2 Capital Gains Taxation and Corporate Capital Structure

2.3 Capital Gains Taxation and Corporate Capital Structure in Central and Eastern Europe

2.3.1 Institutional Background

For the analyses of the impact of individual taxation on debt ratios in Eastern Europe 13 CEE-countries are examined. We use all countries of the region of CEE for which we have available data for an empirical analysis. For each country the tax rate on corporate proﬁts as well as the tax rates on interest, dividends and capital gains at individual investor level are collected over the observation period. The tax rates of the last year under observation (2009) are depicted in table 2.9.78

In table 2.9, τc denotes the top statutory tax rate on corporate proﬁts. τi denotes the top statutory tax rate on income from interest. The variable τd is the top statutory tax rate applied to dividend payments. The variable τg denotes the top statutory tax rate on capital gains. It is assumed that the shareholders are subject to tax in the same country as the corporation.

In 2009, the highest taxation of corporate proﬁts occurred in Ukraine with a percentage of 25 %. The lowest tax rate can be found in Bulgaria and amounts to only 10 %. Regarding taxes on interest income, Latvia applies the highest tax rate (23 %). In Croatia interest payments are tax-exempt. The highest tax rate on dividends and capital gains in 2009 can be observed in Hungary and amounts to 25 %.79

During the observation period from 2001 to 2009 several changes in tax rates in the countries under investigation occurred. Eleven out of 13 countries changed their corporate tax rate (27 changes in corporate tax rates altogether). At investor level most changes occurred in the taxation of capital gains (19 changes

78 All tax rates are taken from European Tax Handbooks of the considered years. 79 Note that all reported tax rates are the top tax rates in the considered country. Reduc- tions due to lower proﬁts or other company characteristics (e.g. quoted corporations) are not included in these tax rates.

37 2 Capital Gains Taxation and Corporate Capital Structure

Country τc τi τd τg Bulgaria 10 % 10 % 5 % 10 % Croatia 20 % 0 % 0 % 0 % Czech Republic 20 % 15 % 15 % 15 % Estonia 0 % 21 % 21 % 21 % Hungary 16 % 20 % 25 % 25 % Latvia 15 % 23 % 0 % 0 % Lithuania 20 % 15 % 20 % 15 % Poland 19 % 19 % 19 % 19 % Romania 16 % 16 % 16 % 16 % Russia 20 % 13 % 9 % 13 % Slovak Republic 19 % 19 % 0 % 19 % Slovenia 21 % 20 % 20 % 20 % Ukraine 25 % 15 % 15 % 15 %

Table 2.9: Tax Rates in Eastern Europe 2009 in capital gains tax rates). The taxation of interest and dividends changed 13 times each in the period under investigation.

2.3.2 Hypotheses Development

In most countries the deductibility of interest payments from debt on company level causes a beneficial treatment of debt financing compared to equity financing. If individual taxes are also taken into account this tax advantage can change depending on the tax rates on interest and dividend payments as well as on the tax rate on capital gains.

As already mentioned in section 2.2.2, Gordon and MacKie-Mason (1990) oﬀer a model on the impact of taxes on corporate ﬁnancing decisions explicitly including investor taxation:

If a ﬁrm adds an extra Euro of debt its investor receives (1 − τi) of the interest payments. If a company decides to ﬁnance by additional equity, an investor

38 2 Capital Gains Taxation and Corporate Capital Structure

receives (1 − τc)(1 − τe) of the proﬁts, where τe is the tax rate on income from equity. As income from equity can be distributed to shareholders either by dividend payments or by retained earnings resulting in capital gains, the tax rate on equity income (τe) can be further decomposed to

τe = dτd + (1 − d)λτg. (2.7)

In this equation d is the dividend payout ratio. Typically, capital gains taxation differs from dividend taxation. Capital gains are not distributed and taxed at shareholder level on an annual basis, but are taxed upon realization. The shareholder can defer the tax payment to the future by extending the holding period or even to infinity, when not selling the shares at all (lock-in effect).

In section 2.2.2 the eﬀective tax rate on capital gains is calculated by using the approach by Wiese (2007), who calculates an eﬀective capital gains tax rate based on the accrual-equivalent capital gains tax rate of Auerbach (1983), which is dependent on the holding period T as well as the growth rate r of the underlying asset:

T 1 ((1 − τ )[(1 + r) − 1] + 1) T − 1 τ e = 1 − g .80 (2.8) g r

As I lack the data for holding periods and growth rates, a proxy to account for the discounting effect has to be used. Based on Feldstein and Summers (1979), Gordon and McKie-Mason (1990) as well as Graham (1999) the term λ is used to account for the discounting effect on the effective capital gains e tax rate. They calculate the effective tax rate on capital gains as τg = λτg. Feldstein and Summers (1979) state that the taxation upon realization as well as the possible deferral of the realization to the future each halve the effective tax rate on capital gains. Therefore the factor λ is calculated to be 0.25.81 For my purposes, the recent estimations of λ from Wagner et al. (2008) seem more appropriate. Wagner et al. (2008) add to the discussions on the implementation of capital gains taxation in business valuation models and

80 See Auerbach (1983), p. 905ff. and Wiese (2007), p. 368ff. 81 See Feldstein / Summers (1979), p. 450ff, Gordon / MacKie-Mason (1990), p. 95f. and Graham (1999), 153f.

39 2 Capital Gains Taxation and Corporate Capital Structure study average returns and holding periods and conduct λ=0.5.82 Following literature on the Tax-CAPM has also used this λ.83 Therefore the net tax beneﬁt of debt ﬁnancing (GL) is calculated as

GL = (1 − τi) − (1 − τc)(1 − (dτd + (1 − d)λτg)). (2.9)

Additional sensitivity analysis for the calculation will follow in section 2.3.4.3.

One can therefore derive the ﬁrst hypothesis:

Hypothesis 1: The higher (lower) the tax advantage of debt (GL) the higher (lower) the debt ratio of corporations.

Taking individual taxation into account, debt becomes more attractive the higher the tax rate on capital gains and dividends. This is because income from equity becomes less attractive when taxed at a higher tax rate, which will make investors demand a higher pre-tax return.

As the impact of individual taxation on corporate ﬁnancing decisions is investigated, the ownership structure has to be included as this inﬂuences the magnitude of the impact of individual investor taxation on debt ratios of corporations.

The more individual investors a corporation has, the more the calculated net tax benefit affects corporate financial policy. This is because the individual taxation of capital gains and dividends only becomes effective for individual shareholders. If for example a corporation only has institutional owners or corporate shareholders which can obtain distribution and capital gains tax- free, the net tax benefit of debt reduces to:

GL = (1 − τi) − (1 − τc). (2.10)

This equation shows that the net tax beneﬁt of debt is less for corporations with no individual shareholders, as no additional taxation of income from equity occurs at investor level. This issue is assessed in the second hypothesis:

82 See Wagner / Saur / Willershausen (2008), p. 736f. 83 See Ihlau / R¨uhl(2008) and Kaserer / Knoll (2009).

40 2 Capital Gains Taxation and Corporate Capital Structure

Hypothesis 2: The magnitude of the eﬀect of net tax beneﬁt of debt depends on ownership structure of a company.

2.3.3 Description of the Data

As for the ﬁrst investigation in section 2.2, the Amadeus and the Osiris Database from Bureau van Dijk are used to create the sample.

As mentioned in section 2.2.3 there are only few studies on the impact of capital gains taxation on corporate ﬁnancial policy that deal with European data. Furthermore, these studies often only include data from listed corporations. A sample of listed and non-listed corporations is used to assess this research question. Additionally, the ownership structure and the payout policy of the corporations are included to the empirical analyses. This improves the results of the analysis regarding the conclusions that can be drawn.

An observation period from 2001 to 2009 is chosen, mainly due to restricted access to data from earlier periods. All corporations from the 13 countries that have at least one individual shareholder recorded are included in the sample. Only these corporations are affected by the taxation of individual investors. Additionally, the sample is restricted to corporations with a minimum of total assets of 1,000 Euro. This results in 17,743 firms in 2009. I track these corporations for all years under investigation and drop all observations where the net benefit of debt cannot be calculated. This is due to missing observations for the payout ratio. Moreover, all observations with insufficient information on liabilities and companies which have a debt ratio above 200 % or below 0 % are dropped.84 Finally the sample contains 77,334 firm-year-observations. Table 2.10 shows the sample generation process.

Debt ﬁnancing of corporations is measured by the book debt to total assets ratio. Book debt is calculated as the sum of current and non-current liabilities in Amadeus.85

Table 2.11 shows the debt ratios of the corporations in the sample per year. It can be shown that the average debt ratio per year is increasing over the

84 See Pfaffermayr / Stöckl / Winner (2009), p. 10. 85 The same measure of debt is used by several previous studies. See, for example, Overesch / Voeller (2010), p. 17 and Pfaffermayr / Stöckl / Winner (2009), p. 9.

41 2 Capital Gains Taxation and Corporate Capital Structure

Description Number of ﬁrm-year observations

Companies fullﬁlling the research criteria in Amadeus-Databases Versions 2002 to 2010 100,741 Companies, for which no payout ratio could be calculated (=Missing data on shareholder funds and/or proﬁt and loss) -21,746 Debt ratio above 200 % or below 0 % -1,661

Final sample including accounting and ownership information 77,334

Table 2.10: Sample Generation Process

Year Mean Std. Dev. N

2001 0.60840535 0.31290510 6,161 2002 0.61498899 0.31364469 7,075 2003 0.64914919 0.30490078 7,644 2004 0.66384690 0.30451101 9,146 2005 0.68074774 0.30271580 10,515 2006 0.70367948 0.30209265 11,736 2007 0.71400745 0.30010183 12,896 2008 0.73950134 0.30264458 12,161 2009 0.4204836 0.2460778 10 Total 0.68207797 0.30729753 77,344

Table 2.11: Summary of Debt Ratios by Year observation period. In 2001 the average debt ratio was 60.84 % whereas in 2008 the average debt ratio rose to 73.95 %. The only exemption of this trend is the year 2009, where the average debt ratio drops to 42.05 %. This is due

42 2 Capital Gains Taxation and Corporate Capital Structure to only 10 observations in this year. I will account for this in the robustness checks.

Country Mean Std. Dev. N

BG 0.68092552 0.28620360 2,628 CZ 0.55614136 0.29117874 3,131 EE 0.45927851 0.30477280 1,723 HR 0.60665403 0.26083260 5,525 HU 0.58870156 0.24724067 3,449 LT 0.55729375 0.23325366 1,275 LV 0.65643631 0.24080072 1,028 PL 0.59445474 0.24357175 7,063 RO 0.64978958 0.28465927 6,949 RU 0.74226788 0.32313833 40,138 SI 0.6516661 0.21193833 1,468 SK 0.64218512 0.25021625 617 UA 0.76806187 0.31043805 2,350 Total 0.68207797 0.30729753 77,344

Table 2.12: Summary of Debt Ratios by Country

Table 2.12 shows the debt ratios of the sample per country. Ukraine has the highest average leverage of corporations with a mean debt ratio of 76.81 %. The lowest debt ratio can be observed in Estonia with only 45.93 %. Regarding the number of observations per country it can be shown that about half of all observations are from Russian corporations. This may distort the estimation results. I will account for this problem in the robustness checks in chapter 2.3.4.3.

43 2 Capital Gains Taxation and Corporate Capital Structure

2.3.4 Regression Analyses

2.3.4.1 Deﬁnition of Variables and Summary Statistics

The eﬀects of investor taxation on the debt ratio of corporations in Central and Eastern Europe are of great interest. The dependent variable DebtRatio is deﬁned by the ratio of book debt to total assets, which are gained from the Amadeus Database. To run the regression tax variables as well as control variables will be used.

To see whether taxation inﬂuences the debt ratio of corporations the net tax beneﬁt of debt as shown in chapter 2.3.2 is included:

GL = (1 − τi) − (1 − τc)(1 − (dτd + (1 − d)λτg)). (2.9)

For τi, τc, τd and τg the top statutory tax rates for the considered years are used as depicted in section 2.3.1. The factor d is the dividend payout ratio of a corporation of a certain year. As there are mainly non-listed corporations in the sample and therefore payouts cannot be observed directly, payouts are calculated by using the profit of a period and subtracting the change in shareholder funds. Dividing by the corporation’s profit of the considered year a firm-specific payout ratio for each year and corporation is obtained.86 As derived in chapter 2.3.2 the debt ratio is expected to be higher for corporations with a higher net tax benefit of debt.

The variables Depr and NOL are implemented to control for other possibil- ities to generate tax-shields (substitution hypothesis). Depr is calculated by dividing depreciations by total assets. The variable NOL is a dummy variable, which is set 1 if there is a loss in the year before the year considered and 0 otherwise. This can only be a proxy for the loss carry-forward for tax purposes as one can only observe the proﬁt or loss from ﬁnancial accounting.87 The higher other tax-deductible items the less tax-shields from interest pay-

86 As I cannot observe if payouts were from retained earnings in reserves, I gain payout ratios above 1 and below 0 in the sample. To gain the factor d for the equation to calculate τe I cut the payout ratio at 1 and 0. Additionally I use other calculations of GL in the sensitivity analysis. 87 See for example Overesch / Voeller (2010) and Pfaﬀermayr / St¨ockl / Winner (2009).

44 2 Capital Gains Taxation and Corporate Capital Structure ments are necessary to lower taxable income. The variables Depr and NOL are therefore expected to be negative.

Previous studies found out that the profitability of a corporation influences the debt ratio. There are several theories about in which direction profitability influences the debt ratio of a corporation. According to the trade off theory more profitable firms should have higher debt ratios as there is a lower risk of financial distress. Also the free cashflow theory suggests that more profitable firms will have higher debt ratios while the pecking order theory argues that firms with investment opportunities are more profitable and less levered.88 The profit or loss of the considered year of a corporation, calculated as the profit or loss per period deflated by total assets lagged by one year, is added to the investigation.

To control for size eﬀects the variable Size is added to the model. Size is measured by the natural logarithm of total assets as stated by Schulman et al. (1996). They found out that larger corporations have higher debt ratios.89

According to Scott (1977)90 tangible assets divided by total assets are included in the regression model. The variable T anAss is expected to be positive as the costs of ﬁnancial distress are lower the higher the tangible assets are as they serve as collateral.

Pfaffermayr et al. (2009) suggest that the debt ratio of a firm is changing over the life-cycle of the corporation. Therefore the variable Age, calculated as the natural logarithm of the years between incorporation and the year under investigation, is added to see whether older firms have smaller debt ratios.91

To control for further company characteristics a dummy variable Quoted indicating whether a corporation is listed or not are included. To control for country-speciﬁc development the variable GDP is added, which is the gross domestic product per capita in U.S. dollar.92

88 See Overesch / Voeller (2010), p. 8 and Wald (1999), p. 172. 89 See Schulman / Thomas / Sellers / Kennedy (1996). In chapter 2.2.4 the natural logarithm of sales is used as a measure for size. I use the total assets in this analysis because of incomplete data on sales. 90 See Scott (1977), p. 33ff. 91 See Pfaffermayr / Stöckl / Winner (2009), p. 2ff. 92 See International Monetary Fund (2001).

45 2 Capital Gains Taxation and Corporate Capital Structure

Table 2.13 shows the summary statistics for the variables included in the empirical model before deﬂation, lag and logarithm.

Variable Mean Std. Dev. Min Max N

DebtRatio .682078 .3072975 .0001009 1.374016 77,344

GL .158696 .0708119 –.1 .37 77,344 NOL .8191327 .3849107 0 1 77,344 Depr 704,204.85 1,325,583 0 9,238,000 29,719 P rofit 880,115.61 2,466,189.3 –4,763,000 15,014,000 77,344 T otAss 21,604,939 34,410,691 1,000 2.347e+08 77,344 T anAss 6,427,840.4 13,103,220 0 92,331,000 77,305 Age 12.94165 17.86875 0 297 67,712 Quoted .0767739 .2662341 0 1 77,344 GDP 7,416.116 4,151.425 1,723.397 27,155.45 77,344

Table 2.13: Summary Statistics of Used Variables in Euro

I additionally add a vector of industry dummies to the empirical analyses to capture the eﬀect that certain industries have higher or lower debt levels. The ﬁrst industry according to the list of NACE-Codes, agriculture, serves as the reference category.

2.3.4.2 Regression Model and Results

To test the ﬁrst hypothesis I run a panel estimation accounting for random eﬀects using a GLS-estimator.93

The basic economic speciﬁcation reads:

DebtRatioj,t = α + β1GLj,t + β2P rofitj,t + β3T otAssj,t + β4T anAssj,t

+β5Agej,t + β6Quotedj,t + β7GDPj,t + β8Industryj,t

+uj,t + j,t. (2.11)

93 I conduct a Hausman test which suggests that random eﬀects estimation is more eﬃcient.

46 2 Capital Gains Taxation and Corporate Capital Structure

Estimation results are shown in table 2.14. Specification 2.1 shows the results for estimating the impact of investor taxation on corporate debt policy excluding the variables controlling for the substitution hypotheses, as only 29,719 firm-year observations for depreciation are available. For all variables used in the second specification this results in 27,771 firm-year observations. Results of specification 2.2 includes the variables testing for the substitution hypothesis.

Specification 2.1 2.2 Variable Coefficient (Std. Err.) Coefficient (Std. Err.)

∗∗∗ ∗∗∗ GL 0.299 (0.013) 0.146 (0.014) NOL –0.062∗∗∗ (0.003) Depr 0.009∗∗ (0.004) P rofit –0.003∗∗∗ (0.001) –0.082∗∗∗ (0.005) T otAss 0.016∗∗∗ (0.001) 0.002 (0.001) T anAss –0.132∗∗∗ (0.005) –0.092∗∗∗ (0.007) Age –0.003∗∗∗ (0.000) -0.002∗∗∗ (0.000) Quoted –0.149∗∗∗ (0.009) –0.103∗∗∗ (0.012) GDP 0.000∗∗∗ (0.000) 0.000∗∗∗ (0.000) Intercept 0.366∗∗∗ (0.016) 0.670∗∗∗ (0.029) Industry yes yes

N 66,815 N 27,771 R2/overall 0.1372 R2/overall 0.1564

2 2 χ(26) 4,581,46 χ(28) 1,974.01

Signiﬁcance levels : ∗ : 10% ∗∗ : 5% ∗ ∗ ∗ : 1%

Table 2.14: Estimation Results for Speciﬁcation 2.1 and 2.2

The coefficient for GL is significant at a 1%-level and positive indicating that the higher the net tax benefit of debt the higher the debt level of corporations in

47 2 Capital Gains Taxation and Corporate Capital Structure the sample. A 1 % increase in the net tax benefit of debt leads to 0.3 % increase in the debt ratio. This supports the first hypothesis derived in chapter 2.3.2 that increasing investor taxation increases the debt financing of corporations. This result is in line with other research of the impact of the net tax benefit of debt on debt ratios of corporations.94

The variable P rofit is negative and significant which is in line with the pecking order theory. This indicates that more profitable firms have lower debt ratios than less profitable corporations. Bigger firms are higher levered, which can be seen from the positive and significant coefficient of T otAss.

The variable T anAss, capturing the effect of tangible assets serving as a collateral and thereby enabling higher debt ratios, is significant, but has the wrong sign. This is not in line with the theory. As suggested by Pfaffermayr et al. (2009), the variable testing for the impact of age on debt ratios (Age) is negative and significant. This implies that older firms have less debt.

The test conducted in specification 2.2 does not show clear support for the substitution hypothesis. While both variables, Depr and NOL, are significant at least at a 5%-level, the coefficient testing for additonal tax-offset through depreciation has the wrong sign.

Additionally, corporations in the industry of construction, amongst others, are found to have signiﬁcantly higher debt ratios, whereas corporations belonging to the public sector show signiﬁcantly lower debt ratios than corporations in the reference category.

Multicollinearity in the speciﬁcations can be excluded by looking at the correlations between the explanatory variables in tables A.6 and A.795, as none of the correlations is above +0.7 or below –0.7.96

Summarizing the first estimations, one can find clear support that the net tax benefit of debt including investor taxation influences the debt ratios of CEE-countries.

To test the second hypothesis, the model is estimated again and information on ownership structures is included. I collect the percentage of individual in-

94 See, for example, Overesch / Voeller (2010), p. 281. 95 See Appendix. 96 I additionally compute variance inﬂation factors. None of the values is above 2.

48 2 Capital Gains Taxation and Corporate Capital Structure vestors of a corporation and generate two subsamples: corporations, in which individuals hold 50 % or more of the shares (specification 2.3; 16,776 firm- year observations) and companies where less than 50 % individual owners are recorded (specification 2.4; 3,954 firm-year observatios). Results for these estimations are depicted in table 2.15.

Specification 2.3 2.4 Variable Coefficient (Std. Err.) Coefficient (Std. Err.)

∗∗∗ ∗∗∗ GL 0.284 (0.024) 0.137 (0.045) P rofit –0.227∗∗∗ (0.009) –0.316∗∗∗ (0.021) T otAss 0.015∗∗∗ (0.002) 0.002 (0.004) T anAss –0.087∗∗∗ (0.008) -0.257∗∗∗ (0.019)) Age –0.004∗∗∗ (0.000) –0.002∗∗∗ (0.000) Quoted –0.153∗∗∗ (0.020) –0.115∗∗∗ (0.017) GDP 0.000∗∗∗ (0.000) 0.000∗∗ (0.000) Intercept 0.433∗∗∗ (0.035) 0.697∗∗∗ (0.071)) Industry yes yes

N 16,776 N 3,954 R2/overall 0.2067 R2/overall 0.2228

2 2 χ(26) 2,487.27 χ(24) 766.33

Signiﬁcance levels : ∗ : 10% ∗∗ : 5% ∗ ∗ ∗ : 1%

Table 2.15: Estimation Results for Speciﬁcation 2.3 and 2.4

As the results show, the overall conclusions remain the same as in specification 2.1 and 2.2. What can be seen is that corporations, which are dominated by individual shareholders (specification 2.3), show a higher coefficient for GL than corporations who have less individual investors. This indicates that the more individuals are invested in corporations, the higher the impact of the net tax advantage of debt financing. To see whether there is significantly higher impact of the net tax benefit of debt for corporations dominated by individual

49 2 Capital Gains Taxation and Corporate Capital Structure shareholders, the specification is estimated again. A variable that interacts the net benefit of debt GL with a dummy for firms dominated by individuals (Individ) is added (specification 2.5).

Variable Coeﬃcient (Std. Err.)

∗∗∗ GL 0.132 (0.028) ∗∗∗ GL ∗ Individ 0.151 (0.025) P rofit –0.248∗∗∗ (0.008) T otAss 0.011∗∗∗ (0.002) T anAss –0.117∗∗∗ (0.008) Age –0.003∗∗∗ (0.000) Quoted –0.143∗∗∗ (0.013) GDP 0.000∗∗ (0.000) Intercept 0.495∗∗∗ (0.031) Industry yes

N 20,730 R2/overall 0.2170

2 χ(27) 3,265.02

Signiﬁcance levels : ∗ : 10% ∗∗ : 5% ∗ ∗ ∗ : 1%

Table 2.16: Estimation Results for Speciﬁcation 2.5

The results of specification 2.5 show that the net tax benefit of debt has significantly more influence on corporations that are dominated by individual shareholders, which can be seen from a positive and significant coefficient

GL ∗ Individ. The results of speciﬁcations 2.3 – 2.5 support the second hypothesis that the magnitude of the impact of taxation, especially individual taxation, depends on the ownership structure of a corporation.

2.3.4.3 Robustness Checks

To see if the results are robust to changes of the variables’ speciﬁcation sensitivity analyses are conducted.

50 2 Capital Gains Taxation and Corporate Capital Structure

As mentioned in chapter 2.3.3, it shall be checked if the results remain the same if observations from Russia (Specification 2.6) or observations of the year 2009 (Specification 2.7) are omitted. The results for these two specifications are shown in table 2.17.

Specification 2.6 2.7 Variable Coefficient (Std. Err.) Coefficient (Std. Err.)

∗∗∗ ∗∗∗ GL 0.152 (0.013)) 0.299 (0.013) P rofit –0.114∗∗∗ (0.004) –0.003∗∗∗ (0.001) T otAss 0.000 (0.001) 0.016∗∗∗ (0.001) T anAss –0.064∗∗∗ (0.006) –0.132∗∗∗ (0.005) Age –0.002∗∗∗ (0.000) –0.003∗∗∗ (0.000) Quoted –0.096∗∗∗ (0.010) –0.151∗∗∗ (0.009) GDP 0.000∗∗∗ (0.000) 0.000∗∗∗ (0.000) Intercept 0.630∗∗∗ (0.026) 0.374∗∗∗ (0.016) Industry yes yes

N 34,791 N 66,805 R2/overall 0.1310 R2/overall 0.1372

2 2 χ(26) 1,869.90 χ(26) 4,582.83

Signiﬁcance levels : ∗ : 10% ∗∗ : 5% ∗ ∗ ∗ : 1%

Table 2.17: Estimation Results for Speciﬁcation 2.6 and 2.7

Results show that also without data from Russia the overall results remain the same, but the impact of GL is smaller though positive and significant. In the sample without Russia the variable Size does not have a significant impact on the debt ratio of corporations. As expected the sample without observations of the year 2009 does not lead to different results.

Further, it is analyzed whether diﬀerent calculations of the net tax beneﬁt of debt change the results obtained for the regression model. First, I leave out

51 2 Capital Gains Taxation and Corporate Capital Structure the term λ, which should account for the discounting eﬀect in the capital gains taxation. Now GL is calculated as:

GL2 = (1 − τi) − (1 − τc)(1 − (dτd + (1 − d)τg)). (2.12)

Second, I try to overcome possible measurement errors of the variable d. As this variable can only serve as a proxy, the speciﬁcation is estimated again using simply the value d=0.5 to calculate the net tax advantage of debt:

GL3 = (1 − τi) − (1 − τc)(1 − (0.5τd + (1 − 0.5)λτg)). (2.13)

Specification 2.8 2.9 Variable Coefficient (Std. Err.) Coefficient (Std. Err.)

∗∗∗ ∗∗∗ GL2/3 0.226 (0.012) 0.336 (0.015) P rofit –0.003∗∗∗ (0.001) –0.003∗∗∗ (0.001) T otAss 0.015∗∗∗ (0.001) 0.016∗∗∗ (0.001) T anAss –0.134∗∗∗ (0.005) –0.133∗∗∗ (0.005) Age –0.003∗∗∗ (0.000) –0.003∗∗∗ (0.000) Quoted –0.145∗∗∗ (0.009) –0.148∗∗∗ (0.009) GDP 0.000∗∗∗ (0.000) 0.000∗∗∗ (0.000) Intercept 0.382∗∗∗ (0.017) 0.350∗∗∗ (0.017) Industry yes yes

N 66,815 N 66,815 R2/overall 0.1353 R2/overall 0.1334

2 2 χ(26) 4,364.25 χ(26) 4,510.05

Signiﬁcance levels : ∗ : 10% ∗∗ : 5% ∗ ∗ ∗ : 1%

Table 2.18: Estimation Results for Speciﬁcation 2.8 and 2.9

52 2 Capital Gains Taxation and Corporate Capital Structure

Results of speciﬁcation 2.8 and 2.9, depicted in table 2.18, show that again the overall results remain the same and support the hypothesis. For the calculation

GL2 the impact is smaller whereas when using the tax beneﬁt of debt calculated as GL3 the impact is stronger. As mentioned in chapter 2.1, Buettner et al. (2006) state that thin capitalization rules have an impact on the debt level of multinational corporations.97 To see whether the existence of thin-capitalization rules changes the obtained results of the empirical analysis I add the variable T hincap to the regression model. T hincap is a dummy variable taking the value 1 if a thin-capitalization rule exists in a country in the sample and 0 otherwise. In the sample, only Estonia and Ukraine have no thin-capitalization rules over the entire observation period. Latvia and Romania introduced thin-capitalization rules in 2003, Slovenia followed in 2004.

Table 2.19 shows the results of the regression model when implementing the variable controlling for thin-capitalization rules. The coefficient of T hincap is significant and negative. This shows that the debt ratio is higher in countries where no such restrictions exist. The other coefficients of the empirical analysis remain nearly unchanged.

Again I control for multicollinearity by looking at the correlations of the variables used in the sensitivity analysis. No evidence for multicollinearity in the model can be found.98

Altogether the sensitivity analyses are in line with the results derived in chapter 2.3.4.2. I find support for the hypotheses that the net tax benefit of debt has a significant impact on debt ratios and that the magnitude of this effect rises if a company is dominated by individual shareholders.

2.3.5 Intermediate Summary

Interest payments for debt are tax-deductible at corporate level in most countries and thereby create an interest tax-shield while payments to equity investors are not deductible from the tax base. This causes a tax distortion to ﬁrm behavior, as debt becomes more attractive.

97 See Buettner / Overesch / Schreiber / Wamser (2006). 98 See table A.10 in the Appendix.

53 2 Capital Gains Taxation and Corporate Capital Structure

Variable Coeﬃcient (Std. Err.)

∗∗∗ GL 0.293 (0.013) T hincap –0.025∗∗∗ (0.004) P rofit –0.003∗∗∗ (0.001) T otAss 0.016∗∗∗ (0.001) T anAss –0.131∗∗∗ (0.005) Age –0.003∗∗∗ (0.000) Quoted –0.150∗∗∗ (0.009) GDP 0.000∗∗∗ (0.000) Intercept 0.383∗∗∗ (0.017) Industry yes

N 66,815 R2/overall 0.1349

2 χ(27) 4,637,38

Signiﬁcance levels : ∗ : 10% ∗∗ : 5% ∗ ∗ ∗ : 1%

Table 2.19: Estimation Results for Speciﬁcation 2.10

Many researches have investigated whether corporate taxation inﬂuences the debt ratios of corporations. Much less researches additionally included taxation of individual investors and used European Data for their investigation.99 This analysis closes this research gap by using a unique data set of 13 CEE- Countries over nine years. This is a particularly important investigation as the tax competition in Eastern Europe caused several tax rate changes in the last decade.

I add to existing research by implementing the ownership structure and the payout policy of corporations to the model. These additional explaining variables are necessary as the net tax beneﬁt of debt including investor taxation depends on the fraction of individuals owning a corporation and on whether

99 See section 2.1.

54 2 Capital Gains Taxation and Corporate Capital Structure proﬁts are distributed to shareholders via dividends or capital gains. These variables have not been implemented in former studies of European data. Fur- ther, the majority of corporations included in the sample is not listed on capital markets which allows more generalized statements for smaller European countries.

As suggested by the first hypothesis, debt ratios in the sample increase with the net tax benefit of debt. This result is robust to different calculations of the net tax benefit of debt. The second hypothesis is supported by the estimation results as the impact of the net tax benefit of debt is higher for corporations which are dominated by individual shareholders. Tests of the substitution hypotheses do not support the theory that other tax-deductible items serve as a substitute for interest payments.

The analyses are limited by the fact that the payout ratio of non-listed firms is not publicly available and can only be approximated. Additionally, more data on ownership of corporations could improve research including ownership issues. The results indicate that ownership structures affect the magnitude of the impact of taxation on corporate financial policy. As corporate ownership has not been examined empirically extensively, I will analyze the impact of capital gains taxation on corporate ownership in the following chapter of this doctoral thesis.

Referring to the results of section 2.2, which showed significant impact of individual capital gains taxation on debt ratios in Austria, the cross-country investigation of the influence of individual taxation in CEE-countries on debt ratios supports the achieved results: when the relationship between taxation and corporate financing decisions is investigated, the taxation at individual investor level has to be implemented to cover all costs of the financing opportunities.

55 3 Capital Gains Taxation and Corporate Ownership

3 Capital Gains Taxation and Corporate Ownership

The previous section has examined the impact of individual capital gains taxation on corporate debt policy in Austria as well as in Central and Eastern Europe. In section 2.2 the achieved results suggest that not only corporations reacted to the increase in capital gains taxation, but also shareholders adjusted their investment strategies. This third chapter of this doctoral thesis aims to find out whether individual capital gains taxation influences the ownership structures of corporations. Ownership structures of corporations vary across the world. In continental Europe, voting power is concentrated among big blockholders. In the USA, the largest shareholder of the majority of the corporations holds less than 5 % of the shares, whereas in Italy the median largest voting block posseses 54.53 % of the shares. In Austria and Germany the median largest blockholder owns 52 % and 52.1 %.100 In Austria and continental Europe, where the majority of corporations are family-owned101, individual capital gains taxation may influence ownership structures. Additional taxes on capital gains could induce owners to adjust their investment decisions to avoid taxation. Shareholders could sell shares or reorganize the ownership structure of a corporation. This may lead to lower tax revenue of capital gains taxation than expected. Research on ownership structures that include tax-aspects is very rare in the scientific community.102 This section aims to close this research gap by investigating the impact of individual capital gains taxation on investor structure with a sample of ownership data of Austrian corporations. This sample differs from earlier research work by using a unique data set of shareholders of Austrian corporations. Additionally, the sample includes family-dominated companies, which may differ from widely held corporations. Also the importance of private foundations shall be investigated.

100 See Becht / R¨oell(1999), p. 1049ﬀ. 101 See Hennerkes / Berlin / Berlin (2007), p. 27 and Austrian Institute for SME Research (2008), p. 2. 102 See section 3.1.

56 3 Capital Gains Taxation and Corporate Ownership

As in section 2.2, I will use the tax reform 2001 in Austria, which expanded the individual capital gains taxation, to conduct the analyses. Besides the changes in individual capital gains taxation, the tax reform 2001 also changed the taxation of private foundations. Since 1993 Austrian law enables the incorporation of private foundations (Privatstiftungen) with a special tax status. This privileges are constantly matter of discussion in Austria as private foundations are said to possess assets amounting to 80 Billion Euro, where 60 % of this value are shares of corporations.103 By 2011, the tax advantages of private foundations were reduced which should lead to additional tax revenues of up to 100 Million Euro per year.104

The following subsections first offer an overview of prior research on the determinants of corporate ownership structure. Then the legal background and the development of the hypotheses is shown. Thereafter, the variables are described and the results of the regression analysis and alternative specifications are presented. The investigation is finished by an intermediate summary.

3.1 Determinants of Corporate Ownership

Regarding the ownership of corporations a cornerstone was set by Berle and Means (1932). They provide a comprehensive work on the agency theory regarding corporate ownership. Also within a country ownership structures vary across corporations or change over time. The following literature review shall document the scientific work on the country-specific and firm-specific determinants of the composition and concentration of ownership structures of corporations. Further, the scientific contributions on the impact of taxation on corporate ownership and investor realization behavior will be discussed.

3.1.1 Country-speciﬁc Determinants

Roe (1990) investigates the impact of law and politics on ownership structures of corporations and argues that certain restrictions, e.g. for the ﬁnancial sector,

103 See Kattinger (2010), p. 31. 104 See Forstner / J¨akkle(2010), p. 2.

57 3 Capital Gains Taxation and Corporate Ownership inﬂuence the ownership structure of ﬁrms.105

Morck and Steier (2005) offer a review of studies in the field of corporate governance in different countries. Corporate governance systems differ in countries due to history, legal system origins and experience from economic crises. In most countries the big businesses were family businesses at first and sometimes still are, which may lead to conservative leadership and change management. The authors argue that shareholder rights and financial development have an influence on corporate governance. The more developed the shareholder rights and the financial management are in a country, the more diffuse the ownership. This suggests an interaction of corporate governance and the ownership structure.106

Benny (2005) analyzes insider trading laws in 33 countries and finds out that countries with strict insider trading laws have more diffuse ownership.107 Bozec et al. (2008) conclude from their study of corporations in the province of Que- bec, Canada, that certain governance provisions and the legal framework can have an impact on corporate ownership structures.108 In a large sample of over 9,000 corporations in 32 countries Holderness (2008) cannot find support that countries with weak legal protection show an ownership structure with large blockholdings. Holderness (2008) criticizes that previous empirical studies of ownership concentration use small samples of large firms which creates a bias as ownership concentration and firm size is inversely related.109

3.1.2 Firm-speciﬁc Determinants

Demsetz and Lehn (1985) find empirically significant influence of the firm size and the instability of the profit rate of corporations on the structure of corporate ownership of 511 U.S. corporations. The bigger the corporation the higher the price for blockholdings which would have to be paid by investors. Therefore bigger corporations show less concentrated ownership. The more stable the profit rate of a corporation, the less noisy the corporate environment

105 See Roe (1990), p. 7ff. 106 See Morck / Steier (2005), p. 1ff. 107 See Benny (2005), p. 144. 108 See Bozec / Rousseau / Laurin (2008), p. 140ff. 109 See Holderness (2008), p. 1ff.

58 3 Capital Gains Taxation and Corporate Ownership and therefore the easier it is for owners to monitor and control their managers. The more stable the profit rate, the less need for control by owners. This results in less blockholding. Additionally, Demsetz and Lehn (1985) find that whether or not the firm is regulated has an influence on corporate ownership.110

Bergströmand Rydquist (1990) analyze the determinants of corporate ownership by investigating a sample of Swedish corporations. The authors find that firm size and firm-specific risk are significant determinants of corporate ownership structures.111 Also Leech and Leahy (1991) find significant lower concentration for bigger firms. They add the age of the corporation to their list of determinants of corporate ownership but do not find significant results.112 Prowse (1992) investigates a sample of Japanese firms. He finds that ownership concentration is lower in U.S. than in Japanese firms. In Japan, financial institutions are the biggest blockholders. Prowse (1992) does not find a significant impact of profitability on ownership concentration.113 Madsen et al. (2007) also include the age of the corporation to their analysis of corporate ownership. Contrary to Leech and Leahy (1991), Madsen et al. (2007) find that older firms have a significantly higher probability to have more than one owner.114

Pindado and de la Torre (2006) add to the analyses above by additionally investigating the decisions on investment, financing and payouts of corporations for a sample of Spanish corporations. They hypothesize that these factors influence the corporate ownership structure. They do find that higher investment expenses lead to significant higher concentration. Their results confirm the free cash flow theory by Jensen (1986).115 Higher debt ratios lead to significant lower concentration of ownership, as monitoring is transferred to creditors. Pindado and de la Torre (2006) do not find a significant impact of the payout policy on corporate ownership.116

Claessens and Tzioumis (2006) compare ownership structures of listed and

110 See Demsetz / Lehn (1985), p. 1155ff. 111 See Bergström/ Rydqvist (1990), p. 237ff. 112 See Leech / Leahy (1991), p. 1418ff. 113 See Prowse (1992), p. 1121ff. 114 See Madsen / Smith / Dilling-Hansen (2007), p. 80ff. 115 See Jensen (1986), p. 323ff. 116 See Pindado / de la Torre (2006), p. 661ff.

59 3 Capital Gains Taxation and Corporate Ownership non-listed corporations using a dataset of 19 European countries. They find out that non-listed firms typically have a large blockholder. In most cases these large blockholders are either families or industrial firms.117

3.1.3 Taxation and Corporate Ownership

Berle and Means (1932) mention taxes as one determinant of the composition of ownership structure of a company.118 The decades after the work of Berle and Means the impact of taxes on corporate ownership was not discussed intensively.

La Porta et al. (1999) are the first ones after Berle and Means who investigate corporate ownership in 27 countries and test the influence of the regulatory framework and taxation on ownership in a country. They include the taxation of intercorporate dividends and the possibility of consolidated accounting for tax purposes. The results show significant influence of the regulatory framework and the level of ownership protection of a country on corporate ownership structures, but La Porta et al. (1999) cannot find evidence that the analyzed tax regulations affect the ownership structure.119

Dahlquist and Robertsson (2001) analyze foreign ownership of Swedish corporations. Their results show that foreign investors prefer large companies and companies paying low dividends. The latter eﬀect is interpreted to be driven by the tax advantage of capital gains compared to dividend payments in most countries, especially for long-term investments.120

Morck et al. (2005) observe a panel of corporate ownership data in Canada and show that Canadian corporations were dominated by wealthy families or individuals at the beginning of the century. Around the 1950ies widely held ﬁrms predominated. Later in the century wealthy families and individuals again controlled the corporate landscape. Other factors like economic growth, history and colonial origins are further mentioned as determinants of corporate ownership. Morck et al. (2005) also mention taxes as one determinant of

117 See Claessens / Tzioumis (2006), p. 266ff. 118 See Berle / Means (1932), p. 53ff. 119 See La Porta / Lopez-de Silanes / Shleifer (1999), p. 471ff. 120 See Dahlquist / Robertsson (2001), p. 413ff.

60 3 Capital Gains Taxation and Corporate Ownership corporate ownership. They point out that the introduction of the capital gains taxation in Canada in 1972 caused the break up of several large groups of wealthy family owners, because assets were transferred to tax-exempt family trusts, causing ﬁrms to be more widely held.121

Desai et al. (2007a) try to explain changes in ownership concentration. Ex- isting literature mainly focuses on corporate governance and corporate ownership. Taxes are added to the investigation as a major determinant of corporate ownership structures. Their basic hypothesis is that an increase in the progressivity of the tax schedule of individuals leads to greater dispersion of ownership across income levels. This is because the higher the tax rate for a marginal investor, the less attractive debt becomes and thus the more equity is issued by corporations. If firms issue more equity the marginal investor shifts to a lower income level which creates greater diffusion of ownership. Desai et al. (2007a) investigate their theory by analyzing an American example. Tax return data is used to calculate a Herfindahl index to test for ownership concentration. By running a time-series regression of the index they find that increases in progressivity of personal tax rates have a significant influence on the diffusion of corporate ownership.122

Bank and Cheﬃns (2008) point out that taxes are potentially an important factor for the ownership structure of corporations. They investigate the historical development of ownership structure in the U.K. and the U.S., where widely held corporations are dominant. They conclude that taxes are an important determinant, but are not the only important factor for corporate ownership structure choice.123

R¨unger(2011) investigates the tax reform in Germany in 2001, which abolished the capital gains taxation for corporations. Results show that the tax reform led to a change in ownership structures as more individuals are invested in Ger- man corporations afterwards. Empirical tests do not support the hypothesis that the tax reform caused a reduction in ownership concentration.124

Regarding the impact of taxation on corporate ownership and shareholder

121 See Morck / Percy / Tian / Yeung (2005), p. 65ff. 122 See Desai / Dharmapala / Fung (2007a), p. 345ff. 123 See Bank / Cheffins (2008), p. 111ff. 124 See Rünger(2011).

61 3 Capital Gains Taxation and Corporate Ownership structures, the theory on tax clienteles should be integrated. Investors of corporations can be rewarded either by dividend payments or by capital gains. Auerbach (1983) stated that diﬀerent clienteles exist which either prefer dividends or capital gains due to their tax status. Investors with a higher tax bracket prefer more risky stocks, which are mostly growth stocks with a low dividend payout ratio. He suggests that a ﬁrm’s payout behavior should therefore depend on the composition of their stockholders.125 Vice versa will shareholders decide upon their investments depending on their tax preference. The payout policy of corporations can therefore be a determinant of ownership structures.

This theory is empirically tested by Perez-Gonzalez (2003). He uses tax rate changes in personal income taxes and shows that when tax rates on dividends or capital gains change, only corporations who have shareholders that are affected by these tax rate changes adjust their dividend decisions. He thereby finds support for the tax clientele effect.126

Also Moser and Puckett (2009) find support for the existence of tax clienteles. In their sample of U.S. firms from 1987 to 2004 they find that companies paying high dividends show significantly more institutional investors.127 Pick (2009) et al. investigate the reaction of stock prices to share repurchases in Germany. The authors tests for a tax clientele effect but fail to gain significant results that companies dominated by individual shareholders show the highest price reaction due to the highest tax advantages. However, Pick et al. (2009) find out that share price reaction of companies dominated by individual shareholders is larger under a full imputation system than under classic corporate taxation.128 Korkeamaki et al. (2010) investigate the tax reform in Finland in 2004, where the taxation of dividend payments at personal level was introduced. While all dividend payments were rising before the tax reform 2004 because they were tax exempt, this effect was significantly higher for corporations with a higher fraction of owners affected by the tax reform.129

There are several studies that investigate whether the taxation of dividends and

125 See Auerbach (1983), p. 805ff. 126 See Perez-Gonzalez (2003), p. 1ff. 127 See Moser / Puckett (2009), p. 1ff. 128 See Pick / Schanz / Niemann (2010), p. 1ff. 129 See Korkeamaki / Liljeblom / Pasternack (2010), p. 572ff.

62 3 Capital Gains Taxation and Corporate Ownership capital gains is capitalized in stock prices (capitalization effect). Collins and Kemsley (2000) find that dividend taxation is fully capitalized in share prices, while only 60 % of the capital gains taxation is included in share prices.130 Studies by Ayers et al. (2002), Dhaliwal et al. (2003a), Dhaliwal et al. (2003b) and Sinai and Gyourko (2004) show that the effects of the individual income tax are capitalized in stock prices.131 Edwards et al. (2004) also investigate the repeal of the corporate capital gains taxation in Germany. Capital gains taxation can be avoided by the investor by not selling the shares. Before the abolishment of the regulation it was said that this lock-in effect caused by the capital gains taxation disabled efficient trading. Edwards et al. (2004) find significant impact of the repeal of the corporate capital gains taxation on the market value of the investigated firms.132 Dai et al. (2008) investigate the tax relief act 1997 in the USA. Results show that the equilibrium impact of capital gains taxes reflects the capitalization effect as well as the lock-in effect.133

Another research area which can offer some evidence on the determinants of ownership structures are papers on taxation and investor realization behavior. If realization decisions of investors of corporations are affected by tax regulation, this also influences the ownership structure of these firms. Stiglitz (1983) shows that taxation of capital gains leads to distortion in stock sales of investors.134 Feldstein and Yitzhaki (1978) examine whether capital gains taxation has an impact on the behavior of investors to perform the disposal of stocks. They find a significant negative correlation between the marginal tax rate and the sale of shares by examining data of 2,557 U.S. households. Further analyses show that taxation of capital gains at the ordinary income tax rate would lead to a massive lock-in effect.135

Feldstein et al. (1980) conduct an econometric analysis by investigating a data set of individual tax returns of the year 1973. This data contains detailed information about the date of acquisition and sale, the purchase price and

130 See Collins / Kemsley (2000), p. 405ff. 131 See Ayers / Cloyd / Robinson (2002), p. 933ff., Dhaliwal / Li / Trezevant (2003a), p. 155ff., Dhaliwal / Erickson / Frank / Banyi (2003b), p. 179ff. and Sinai / Gyourko (2004), p. 1543ff. 132 See Edwards / Lang / Maydew / Shackelford (2004). 133 See Dai / Maydew / Shackelford / Zhang (2008). 134 See Stiglitz (1983), p. 257ff. 135 See Feldstein / Yitzhaki (1978), p. 17ff.

63 3 Capital Gains Taxation and Corporate Ownership the type of asset. Feldstein et al. (1980) use three dependent variables: the long term sales per dollar of dividends received, the probability of a sale and the long term gains per dollar of dividends received. They measure the tax rate applicable with the tax rate on the last dollar of capital gains realized. The econometric analysis of the data shows that disposals of corporate stock decrease if tax rates on capital gains increase. More specific, Feldstein et al. (1980) show a significant negative influence of the tax rate, the age of the investor and the level of income. They mention that these results indicate that the lower the capital gains taxation the more active the capital market. This would increase tax revenues.136

Auten et al. (1989) present an econometric analysis of panel data with which they analyze how investor realization behavior responds to changes in capital gains taxation. By using data from a panel of federal income tax returns they find out that income shifting and wealth do not substantially influence realization behavior of investors.137 Burman and Randolph (1994) also use panel data for their examination of permanent responses to capital gains tax changes. They split the variable for the tax rate in two components: The normal expected tax rate in a year (federal and state) and a transitory com- ponent which captures tax planning activities of the individual. In this way they can divide between permanent and temporary effects of capital gains taxation. They show that the permanent elasticity of capital gain realizations on changes in the permanent tax rate is low, whereas the temporary elasticity is very high with a value of -6.42.138

Mariger (1995) explores capital gains realization behavior and its impact on tax revenues. He illustrates the after-tax average annual return for an asset is increasing by the holding period. The increase is relatively greater the higher the capital gains tax rate is. This implicates that the higher the capital gains taxation the longer will investors hold their assets, which leads to the lock-in eﬀect. He additionally ﬁnds out that realizations of capital gains are responsive to tax rates in the short run, but much less in the long run.139

Eichner and Sinai (2000) also examine the response of capital gains realizations

136 See Feldstein / Slemrod / Yitzhaki (1980), p. 777ff. 137 See Auten / Burman / Randolph (1989), p. 353ff. 138 See Burman / Randolph (1994), p. 794ff. 139 See Mariger (1995), p. 447ff.

64 3 Capital Gains Taxation and Corporate Ownership to tax rates. They state that if realizations of capital gains are sufficiently elastic, a reduction in the rate of capital gains taxation could rise sales and therefore lead to higher tax revenues for the state. By looking at a data set from 1986 to 1997 they find elasticity of capital gain realizations to changes in the capital gains tax rate between –0.64 and –0.81. These results are driven by the year 1986 when the TRA was enacted. When excluding 1986 from the sample, elasticity drops to –0.45. Eichner and Sinai (2000) conclude that if realizations of capital gains are sufficiently elastic, a tax rate reduction could raise tax revenues.140

Desai and Gentry (2004) investigate the impact of corporate capital gains taxation on the realization decisions of firms. They state that individual investors as well as corporations have an incentive to defer realization of capital gains to the future to avoid tax payments. The other way round an investor may have an incentive to sell a stock that creates a capital loss to benefit from the tax reduction when deducting the loss against other income. For corporations a capital gains taxation also determines tax planning. A mentioned example is that the dividend received deduction (DRD) in U.S. tax law offers a relief from potential ’triple taxation’ of corporation income, whereas there is no preferential taxation for corporate capital gains. Additionally the DRD gives corporations the incentive to use dividend stripping. Desai and Gentry (2004) also mention that the sentiment on the capital market influences realization behavior.141 Baker and Wurgler (2006) offer a review of possible measures of market and investor sentiment for listed corporations.142

Desai et al. (2007b) analyze the interaction between corporate governance, taxes and ownership concentration. They state that the tax system can improve corporate governance through simpliﬁcation and increased enforcement. Additionally their model shows that an optimal, revenue-maximizing level of corporate tax rate is lower for countries with high ownership concentration. For a controlling bloc that reaches 36 %, an increase in tax rates starts to have no eﬀect on tax revenues.143

Jacob (2010) develops the hypotheses, that the propensity to realize a capital

140 See Eichner / Sinai (2000), p. 663ff. 141 See Desai / Gentry (2004), p. 1ff. 142 See Baker / Wurgler (2006), p. 1645ff. 143 See Desai / Dyck / Zingales (2007b), p. 591ff.

65 3 Capital Gains Taxation and Corporate Ownership gain (loss) decreases (increases) by the marginal income tax rate. Further, capital gain realizations increase if an investor can offset the gain against losses from other income components or loss carry-forwards form previous years. By investigating a data set of three million tax statements of German filers, Jacob (2010) finds out that the probability that a taxpayer realizes a capital gain is negatively related to the adjusted gross income and the marginal tax rate of the individual.144

144 See Jacob (2010), p. 1ﬀ.

66 3 Capital Gains Taxation and Corporate Ownership

3.2 Capital Gains Taxation and Corporate Ownership in Austria

3.2.1 Institutional Background

The history of the taxation of capital gains in Austria has already been described in section 2.2.1. Also for the investigation of the impact of capital gains taxation on corporate ownership, I choose the tax reform 2001 in Aus- tria, which reduced the threshold for taxable capital gains from 10 % to 1 %. Until 2011, the half average individual tax rate on ordinary income was applied if a capital gain was taxable. As mentioned in 2.2.1, interest and dividend payments in Austria are taxed at a ﬂat withholding tax rate of 25 %. The statutory tax rate for corporate proﬁts is also 25 %.

The tax reform 2001 did not only change the taxation of capital gains of individual investors, also some changes in the taxation of private foundations were enacted. Private foundations are juristic persons and were introduced in Aus- tria in 1993.145 Private foundations were introduced as a means to manage and preserve property and have special tax-laws: when shares are transferred by the founders to a private foundation an entry tax τen (Eingangssteuer) on the market value of the shares becomes eﬀective. This entry tax was 2.5 % before 2001, was increased to 5 % by 2001 and lowered to 2.5 % again in 2008.146 Div- idend payments and realizations of capital gains are taxed at an intermediate tax τint of 12.5 % since 2001 when held by a private foundation. Before 2001, dividends and and capital gains were not taxed at all when held by a private foundation. If the income is transferred to the founder, the dividends received and the capital gains are taxed at the subsequent ﬂat tax rate of 25 %. The intermediate tax already paid (after 2000) on this income is deducted from the tax liablity. Until 2008 also the historical value of the contributed shares is taxed by 25 % if paid back to the founder. The tax reform act of 2011 in Austria raises the intermediate tax for private foundations from 12.5 % to 25 %.

Table 3.1 shows a summary of tax rates in Austria from 2000 to 2011:

145 See BGBl. 694/1993. 146 See BGBl. I 142/2000 and BGBl. I 85/2008.

67 3 Capital Gains Taxation and Corporate Ownership 25% 25% 25% 25% 25% 25% 2.50% from 2011 25% 25% 25% 25% 2.50% 12.50% 2008-2010 25%, Threshold 1% 5% 25% 25% 25% 25% 12.50% 2005-2008 25%, Threshold 1% 5% 34% 25% 25% 25% 12.50% 2001-2004 25%, Threshold 1% Table 3.1: Tax Rates in Austria 0% 34% 25% 25% 25% 2.50% before 2001 25%, Threshold 10% Entry Tax Intermediate Tax Subsequent Tax Tax rate on Corporations Capital Gains Dividends Interest Private Foundation

68 3 Capital Gains Taxation and Corporate Ownership

3.2.2 Model and Research Hypotheses

Applying a growth model based on Gordon and Shapiro (1956) and Gordon (1963) the investor decides based on the present value of an investment in shares.147 Tax aspects are included based on K¨onigand Wosnitza (2000) and Sureth and Langeleh (2007).148

An investor acquires a shareholding at the acquisition price P0 and receives annual dividend payments Dt the following years. If he sells his investment at the date t = T he will receive the market price of the investment PT . Depending on the capital gains tax regime the disposal of the stock causes a taxation of the capital gain (PT − P0) with the applicable tax rate for capital gains (τg).

To identify the impact of individual capital gains taxation on ownership structures of Austrian corporations two shareholder types, which are aﬀected by the tax reform act of 2001, namely the individual investors holding between 1 % and 10 % and private foundations, shall be investigated.

3.2.2.1 Investment Decisions of Individual Investors

For realized capital gains exceeding the threshold for substantial shareholdings, it is assumed that the investor is taxed at the Austrian top statutory tax rate of 50 % and therefore faces a statutory tax rate on capital gains (τg) of 25 %. Referring to the change of the threshold for taxable capital gains in 2001 one can determine the statutory capital gains tax rate τg for Austria as

before 2001 2001-2010 since 2011   0.25 if share ≥ 10% 0.25 if share ≥ 1% τg = τg = τg = 0.25 0 if share < 10% 0 if share < 1%

Before the introduction of the lower threshold for substantial shareholdings, an investor holding between 1 % and 9.99 % of a corporation achieves a present bR value (PV ) of the discounted selling price (PT ) and the discounted dividends

147 See Gordon / Shapiro (1956) and Gordon (1963). 148 See K¨onig/ Wosnitza (2000) and Sureth / Langeleh (2007).

69 3 Capital Gains Taxation and Corporate Ownership

(Dt), taxed at the tax rate on dividend payments (τd), less the initial investment (P0). The variable iτ is assumed to be the constant market rate of return after taxes.

T bR −T X −t PV = −P0 + PT (1 + iτ ) + Dt(1 − τd)(1 + iτ ) . (3.1) t=1

If the investor holds the same investment in the tax regime after 2001, the capital gain is taxable as the threshold for taxable substantial shareholdings has dropped to 1 %. The investors’ present value (PV aR) is now reduced by the addional tax payment on the realized capital gain:

aR −T −T PV = −P0 + PT (1 + iτ ) − τg(PT − P0)(1 + iτ ) T X −t + Dt(1 − τd)(1 + iτ ) . (3.2) t=1

Comparing equations (3.1) and (3.2) shows that a realization of capital gains is advantageous before the reduction of the threshold as the investor can receive a tax-exempt capital gain. As a holding between 1 % and 9.99 % is less proﬁtable after the taxreform of 2001, I expect that shareholders sell or reorganize their holdings, which will result in a lower fraction of investors holding between 1 % and 9.99 % after the tax reform act of 2001.

3.2.2.2 Investment Decisions of Private Foundations

As most of the corporations in Austria are family-held one would expect families to reorganize their holdings to avoid future taxation. A way of reorga- nization is the contribution of shares to a private foundation. If an investor acquires shares and immediately transfers the investment to a private foundation and the foundation is selling the investment at t = T , the investor will bR receive a present value before 2001 (PVpF ) of

T bR −T X −t PVpF = −P0(1 + τen) + PT (1 + iτ ) + Dt(1 + iτ ) (3.3) t=1

70 3 Capital Gains Taxation and Corporate Ownership if the capital gain is left in the private foundation.149

When comparing the present value of equation 3.3 with the present values of the individual investor (3.1) it can be shown that holding the shares via the private foundation will be advantageous if the tax shelter regarding the tax-exempt dividends and capital gains exceeds the entry taxation.

After 2001 dividends and capital gains are taxed with the intertemporal tax

(τint) when realized at the level of the private foundation:

aR −T −T PVpF = −P0(1 + τen) + Pt(1 + iτ ) − τint(Pt − P0)(1 + iτ ) T X −t + Dt(1 − τint)(1 + iτ ) . (3.4) t=1

Comparing the investment in shares through a private foundation before and after the tax reform, it can be seen that also the private foundation becomes less attractive due to a higher taxation.

When comparing the present values of individual investments and investment by a private foundation after the tax reform (see 3.2 and 3.4), one can see that due to the lower tax rate on dividends and capital gains the private foundation can achieve a higher present value if the tax advantage regarding the taxation of dividends and capital gains exceeds the entry taxation. The higher the income from dividends and capital gains the more proﬁtable the private foundation becomes. As family members tend to hold their investments over a longer period the lower intermediate taxation will lead to a rise in the present value. I therefore expect that incorporations of private foundations will rise after 2001 due to tax beneﬁts compared to individual investments.150

149 When the shares are distributed back to the founder, the subsequent taxation (τs) on the capital gains, the dividends as well as the contributed value of the shares becomes bR −T PT −t PT eﬀective at t=T: PVpF = −P0(1+τen)+Pt(1+iτ ) + t=1Dt(1+iτ ) −τs( t=1Dt + −T PT )(1 + iτ ) . 150 Again, if shares are distributed to the founder at t = T a subsequent taxation becomes aR eﬀective, but the intertemporal tax can be credited: PVpF = −P0(1 + τen) + PT (1 + −T −T PT −t PT iτ ) − τint(PT − P0)(1 + iτ ) + t=1Dt(1 − τint)(1 + iτ ) − (τs − τint)( t=1Dt + −T (PT − P0))(1 + iτ ) + τsP0.

71 3 Capital Gains Taxation and Corporate Ownership

3.2.2.3 A Numerical Example

To better illustrate the effects of the tax reform 2001 on investment decisions and to compare the investments of individual investors and private foundations a numerical example is shown: suppose an investor owns 5 % of a corporation, where the initial investment was P0 = 1 and the market rate of return after corporate taxes is i = 10 %. Therefore the investment generates profit of iPt−1 each period. For the first period, this would result in a profit after corporate taxes of 1 ∗ 0.1 = 0.1. This profit is partly paid out as dividends, the dividend payout ratio is d = 0.5. Applying the growth model, each period diPt−1 is paid out to the investors, (1−d)iPt−1 remains in the corporation and therefore increases the value of the firm. The present values before and after the tax reform of 2001 are calculated applying the equations 3.1 - 3.4 derived above.

Results in table 3.2 show that the present value of the investment of the individual investor is lower after the tax reform. This is caused by the additional taxation of the realized capital gain. This suggests that an investment between 1 % and 9.99 % of a corporation is less attractive after 2001.

The private foundation, when avoiding subsequent taxation by not distributing the earnings from dividends and capital gains back to the founder, achieves a higher present value before and after the tax reform of 2001 compared to the individual investor. Looking at the relative diﬀerence, the investment via private foundations is relatively more advantageous after the tax reform. Before 2001, the investment via a private foundation oﬀered 76.62 % more present value, while after the tax reform the present value is 242.06 % higher under these assumptions. One can conclude that the private foundation is more attractive compared to individual investments after the tax reform 2001.

72 3 Capital Gains Taxation and Corporate Ownership 0.0285512 0.0691107 –0.0678225 After Tax Reform 0.1048351 0.1846702 –0.0129223 Before Tax Reform Present Values Table 3.2: Present Values of Investment in Shares without subsequent taxation with subsequent taxation Investment by Individual Private Foundation

73 3 Capital Gains Taxation and Corporate Ownership

3.2.2.4 Hypotheses Development

The equations 3.1 - 3.4 and the numerical example in section 3.2.2.3 lead to the following two hypotheses:

Hypothesis 1: Shareholdings between 1 % und 9.99 % held by private investors will decrease after the tax reform of 2001.

Hypothesis 2: Shares held by private foundations will increase after the tax reform of 2001.

3.2.3 Ownership Structure of Austrian Companies

3.2.3.1 The Sample

To test the developed hypotheses the ownership structure of Austrian corporations is investigated. Also for the third investigation in this thesis, the Amadeus and Osiris Database from Bureau van Dijk are used to create the sample.

Gaining specific results for small economies like Austria is essential for a better understanding of the impact of taxation on ownership structures in Europe. Therefore a sample of Austrian corporations is used. Most of the studies investigate aggregate data or data from listed companies. By contrast, I investigate firm-level data of a sample of non-listed corporations. This generates new information on the behavior of corporations of different sizes and legal status. This is especially important as a predominant part of companies in Austria is not listed on the stock exchange. Additionally, the sample contains many family-owned companies, which are an important actor in the Austrian economy.

The tax reform was enacted in January 2001. The ﬁrst media releases an- nouncing the tax reform were published in February 2000. Like for the ﬁrst investigation for Austria in section 2.2, an observation period from 1999 to 2004 is chosen.

74 3 Capital Gains Taxation and Corporate Ownership

The Amadeus Database for 2001 has data for 31,773 Austrian corporations containing 1,104 public and 30,669 private limited companies. To gain the sample all corporations for which no shareholdings between 1 % and 9.99 % are recorded are eliminated, as the percentage of ownership of this category is the main dependant variable of the empirical investigation. The corporations remaining are the ones which are affected by the implementation of an additional capital gains taxation. Then all corporations for which ownership data for the years observed is not available are dropped. For the corporations included all relevant data from 1999 to 2004 is collected. The years from 1999 to 2002 are not covered consistently by the Amadeus Database for all corporations. This may be due to the fact that non-listed corporations are investigated, where relevant data is not publicly available. To enlarge the sample, additional financial reporting data is obtained by searching of documents from the Austrian Commercial Register for corporations which are covered in the databases but have single missing data items. I finally obtain a sample of 1,188 firm-year observations of 198 Austrian corporations.

3.2.3.2 Corporate Ownership from 1999 to 2004

In order to be able to investigate the ownership structure of Austrian corporations between 1999 and 2004, eight diﬀerent shareholder types are classiﬁed:

• Individual investors holding at least 10 % of a corporation (Individ ≥ 10%)

• Individual investors holding at least 1 % but less than 10 % of a corporation (Individ ≥ 1%)

• Individual investors holding less than 1 % of a corporation (Individ < 1%)

• Foreign individual investors (IndividF oreign)

• Corporate investors (Corporate)

• Foreign corporate investors (CorporateF oreign)

• Private foundations (F oundation)

• State (State)

75 3 Capital Gains Taxation and Corporate Ownership

All these variables are the percentage of all investors of the certain type per corporation per year. Mean values of the above deﬁned shareholder types per year are shown in table 3.3.

Investor Type/Year 1999 2000 2001 2002 2003 2004 Individ ≥ 10% 53.93% 52.32% 49.22% 47.42% 46.91% 45.44% Individ ≥ 1% 7.99% 7.30% 6.39% 5.47% 5.04% 4.71% Individ < 1% 0.09% 0.05% 0.05% 0.06% 0.07% 0.06% F oundation 5.31% 5.99% 6.67% 7.13% 7.47% 7.38% IndividF oreign 0.82% 0.80% 0.28% 0.28% 0.28% 0.28% Corporate 25.99% 27.54% 30.32% 32.38% 32.87% 34.25% CorporateF oreign 5.47% 5.60% 6.61% 6.81% 6.89% 7.42% State 0.46% 0.46% 0.46% 0.46% 0.46% 0.46%

Table 3.3: Mean Values of Owners of Austrian Corpo- rations from 1999 to 2004

Figure 2: Ownership Structures of Austrian Corpora- tions from 1999 to 2004

Over all periods under review individuals holding a share above 10 % are the predominant investors. This may be due to the fact that a sample of non-listed corporations is investigated, which are often family-dominated. Additionally,

76 3 Capital Gains Taxation and Corporate Ownership as the effects of the tax reform of 2001 shall be observed, a sample of corporations affected by this tax reform is used, which excludes all corporations having only corporate investors. Nevertheless, the ownership type of corporate investors make up the second largest investor in the sample. The fraction of corporations invested in Austrian firms additionally rises during the observation period from 25.99 % in 1999 to 34.25 % in 2004. Generally, the fraction of individual investors of Austrian corporations decreases over the investigation period. As predicted, one can see a decrease of the percentage of individual shareholders holding between 1 % and 10 % of nearly one percentage point when the tax reform became effective. Additionally, a test for differences in the sample mean before and after the taxreform is conducted and the null hypotheses of no difference can be rejected. This supports the first hypothesis.151 Also in accordance with the developed hypotheses, the average share held by private foundations rises during the observation period from a mean value of 5.31 % in 1999 to 7.38 % in 2004. But the test for differences in the sample mean of the variable F oundation before and after the taxreform is only significant at a 15%-significance-level.

As family-dominated corporations are important in Austria, it is of great interest to know whether these corporations show a different ownership structure compared to non-family firms. Table 3.4 shows that the fraction and development of investors holding between 1 % and 10 % of family and non-family companies does not substantially differ. Contrary to this result, holdings by private foundations do vary over the periods observed. Family-firms show increasing investments by private foundations, whereas the percentage of private foundations as owners of non-family firms even decreases over the years. This is also supported by a significant test of the difference in mean values of the holdings of foundations in family and non-family firms. This suggests that owners of family-firms use the construct of private foundations more than non-family firms. This is additionally supported by an investigation that shows that the reasons of founders to set up a private foundation are - beneath tax benefits - mostly protection of assets in cases of divorces or inheritance.152

151 To see if there are generally differences in the sample before and after the taxreform, I test for differences in mean values of other firm-characteristics (sales, profit and legal form) but do not find significant results. 152 See Rasteiger (2007), p. 6ff.

77 3 Capital Gains Taxation and Corporate Ownership

Individ ≥ 1% Foundation Family Non-Family Family Non-Family 1999 7.92% 8.06% 4.75% 5.93% 2000 7.06% 7.57% 5.69% 6.31% 2001 6.22% 6.59% 8.53% 4.61% 2002 5.49% 5.44% 9.64% 4.56% 2003 5.00% 5.08% 11.36% 3.50% 2004 4.52% 4.91% 11.49% 3.26%

Table 3.4: Development of Individual Investors and Pri- vate Foundations Invested in Family Firms

3.2.4 Regression Analyses

3.2.4.1 Deﬁnition of Variables and Summary Statistics

To see whether tax and non-tax factors are determining corporate ownership structure in Austria, the impact of several variables on individual investors holding between 1 % and 10 % is investigated. An analysis of the fraction of private foundations invested in Austrian corporations follows.

The main variable of interest is the variable T axreform, which is a dummy variable taking the value 1 after 2001. This variable indicates whether the ownership structures of Austrian corporations have changed after the implementation of the lower threshold for taxable capital gains. As a lot of corporations in Austria are family-dominated I control for family-owned corporations by including the dummy F amily in the speciﬁcation. The dummy will be 1 if 50 % or more of a corporation in the sample are owned by family members and 0 otherwise.153

To control for size effects the variable Sales is implemented. As profitability of corporations might influence the ownership structure, the variable P rofitability

153 Family members are identiﬁed by their last name. Of course, this approach is only an approximation since other measures of family membership are not available.

78 3 Capital Gains Taxation and Corporate Ownership is added. I define this variable in two ways: First by the profit and loss per period of the company in the considered year. As the profit and loss per period is only reported for less than the half of the firm-year observations, the change in sales is additionally used as a proxy for profitability. The observations of profit and loss per period and of sales are correlated at 0.87. Although the change in sales might not be an accurate measure, it may at least offer some sensitivity analysis regarding the investigation on the impact of profitability. All variables mentioned are winsorized to account for outliers. Additionally, whether the legal status has a significant influence on the ownership structure of corporations shall be determined. Therefore, the variable Legal is included. Legal takes the value 1 if the company is a public limited corporation (AG) and 0 if it is a private limited corporation (GmbH). Literature suggests that older firms have more shareholders and show a less concentrated ownership structure, respectively. To control for an impact, the variable Age is added to the specification. Age is defined as the number of years since incorporation. As the dot-com bubble happened in the first years of the observations period, there is need to control for general development of the market in the analyses. First, the dividend ratio per year on the Austrian stock market is included, DivR. Further, the variable WBI is added, which is the percentage of annual change of the index of the Vienna stock exchange. I also control for industry and regional effects by including a vector of industry dummies as well as a vector of dummies for the place of business. In the analyses yes is reported in the regression results if at least one of the industry or regional dummies shows a significant impact and no if the corresponding coefficients are not significant. Table 3.5 shows the summary statistics for the variables used. For all subsequent analyses the natural logarithm of sales is taken and the profit or loss per period is deflated by sales to avoid size effects. I would like to add further variables like the payout ratio or capital expenditures, but again, as this is an investigation of non-listed corporations there is no access to these data.

3.2.4.2 Regression Model and Results

Tests of Hypothesis 1 To test the ﬁrst hypothesis, the variable Individ ≥ 1% is used as the dependant variable. For the speciﬁcations 3.1 and 3.2 two variables using balance sheet

79 3 Capital Gains Taxation and Corporate Ownership

Variable Mean Std. Dev. Min Max N Individ ≥ 1% 0.06150 0.07710 0 0.54000 1,188 F oundation 0.06656 0.23662 0 1 1,188 T axreform 0.66667 0.47160 0 1 1,188 Sales 39,094,015 73,608,248 236,000 610,500,000 1,019 ∆Sales 0.20884 1.91123 –0.93293 18.55143 895 PL P eriod 1,364,990 3,858,379 –3,692,000 29,000,000 449 Loss 0.4972067 0.5002718 0 1 895 F amily 0.51431 0.50001 0 1 1,188 Legal 0.020202 0.14075 0 1 1,188 Age 27.73 23.92 1 147 1,188 DivR 0.02260 0.00220 0.02120 0.02740 1,188 WBI 0.13776 0.19419 –0.07400 0.48820 1,188

Table 3.5: Summary Statistics

data are omitted as this would reduce the sample size. The first specification is an OLS-regression with robust standard errors clustered by the firms in the sample. The basic economic OLS-specification is shown in equation 3.5. Second I run a panel estimation accounting for random effects using a GLS- estimator (specification 3.2.). Results of both specifications are shown in table 3.6.

Individ ≥ 1%j,t = α + β1T axreformt + β2F amilyj,t + β3Legalj,t

+β4Agej,t + β5DivRj,t + β6WBIj,t + β7Industryj,t

+β9Regionj,t + j,t (3.5)

In both estimations the coefficient for the variable T axreform is significant and negative. This shows that the fraction of shareholders, which are individuals who hold between 1 % and 10 % of a corporation, is significantly smaller

80 3 Capital Gains Taxation and Corporate Ownership

Estimation 3.1 3.2

Variable Coefficient (Std. Err.) Coefficient (Std. Err.) T axreform –0.0138∗∗∗ (0.004) –0.0138∗∗∗ (0.004) F amily 0.0001 (0.009) 0.0002 (0.007) Legal –0.0202 (0.016) –0.0156 (0.035) Age –0.0003∗∗ (0.000) –0.0004∗ (0.000) DivR –1.0206∗∗ (0.483) –1.0162 (0.664) WBI –0.0273∗∗∗ (0.010) –0.0271∗∗∗ (0.008) Intercept 0.1140∗ (0.059) 0.1157∗∗ (0.053) Industry Effects no no Regional Effects yes no

N 1,188 1,188 R2/overall 0.079 0.079

2 F (23,197) / χ(23) 3.194 103.978

Signiﬁcance levels : ∗ : 10% ∗∗ : 5% ∗ ∗ ∗ : 1%

Table 3.6: Estimation Results for Speciﬁcation 3.1 and 3.2

after the reduction of the threshold for taxable capital gains in 2001. This is in accordance with the results of chapter 3.2.3.2 and supports the first hypothesis. The variable testing for different ownership structures regarding individuals holding between 1 % and 10 % in family-dominated companies, F amily, is not significant in any of the two estimations. This is in line with the summary statistics in section 3.2.3.2.

The legal form of the corporation does not show a significant impact in the model. This might be due to the fact that only non-listed corporations are included in the sample, where the differences between the two legal forms are not as wide as if publicly traded corporations were included. The coefficient Age is significant and negative in both estimations. These results suggest that

81 3 Capital Gains Taxation and Corporate Ownership older corporations have less individuals holding between 1 % and 10 %, though the impact is very small. The variable DivR is significantly negative in both estimations, indicating that the fraction of the shareholder type investigated is smaller for higher dividend yields. This result has to be interpreted with caution as it is only significant in the OLS-estimation. The variable capturing market development, WBI, is significant and negative. This indicates that the higher the index, the lower the percentage of individuals holding between 1 % and 10 %, which could be caused by higher trading volume. I run the first two regressions again and implement industry and regional dummies. In the first two specifications significant impact of industries on individual investors holding between 1 % and 10 % can be found. Significant regional effects can be found in specification 3.1, but these effects are not confirmed by specification 3.2.

To control for multicollinearity, correlations between the explanatory variables are analyzed. As table A.11 in the appendix shows, no high correlations between the variables can be found and therefore the problem of multicollinearity in the results can be excluded.154 Using the F-test and the Wald-test for the goodness of ﬁt the hypothesis that the model has no explanatory power can be rejected at a 1%-level.

Further analyses are conducted to see if the results are robust. First the estimation is extended by the variable lnSales, which reduces the sample size to 1,019 ﬁrm-year observations. The results of these additional speciﬁcations are shown in table 3.7.

Table 3.7 shows that the overall results remain unchanged. Still the coefficient accounting for a change in ownership structure after 2001, T axreform, is negative and significant. Also the other coefficients, which have shown a significant influence before (Age, DivR and WBI) remain sign and significance.

Additionally, the now implemented variable lnSales is significant and positive, which shows that bigger companies have more individuals holding between 1 % and 10 % in their ownership structure. For specification 3.3 significant industry and regional effects can be found, but these are not supported by specification 3.4.

154 Additionally variance inﬂation factors are computed to control for multicollinearity. None of the values is above 2.

82 3 Capital Gains Taxation and Corporate Ownership

Estimation 3.3 3.4

Variable Coefficient (Std. Err.) Coefficient (Std. Err.) T axreform –0.0152∗∗∗ (0.005) –0.0134∗∗∗ (0.004) F amily 0.0031 (0.009) 0.0010 (0.008) lnSales 0.0091∗∗ (0.04) 0.0048∗∗ (0.002) Legal –0.0242∗ (0.014) –0.0213 (0.035) Age –0.0004∗∗∗ (0.000) –0.0004∗ (0.000) DivR –1.3391∗∗ (0.597) –1.0982 (0.742) WBI –0.0248∗∗ (0.012) –0.0264∗∗∗ (0.010) Intercept 0.1042 (0.072) 0.0438 (0.082) Industry Effects yes no Regional Effects yes no

N 1,019 1,019 R2/overall 0.1061 0.10

2 F (23,191) / χ(23) 3.23 85.32

Signiﬁcance levels : ∗ : 10% ∗∗ : 5% ∗ ∗ ∗ : 1%

Table 3.7: Estimation Results for Speciﬁcation 3.3 and 3.4

As it is further interesting if the profitability of a corporation influences the ownership structure a measure of profitability is added to the regression model. As mentioned in chapter 3.2.4.1 only limited data on the profit and loss of the corporations in the sample is available. Therefore two measures of profitability are investigated. First, in specification 3.5, the change in sales is added to capture profitability, as this results in more observations. Then the profit and loss per period is used for specification 3.6, which amounts to only 435 observations for which all variables are recorded. Results of the random effects panel regression analyses of specification 3.5 and 3.6 are shown in table 3.8.

The overall results of speciﬁcation 3.5 remain unchanged. The variable T ax-

83 3 Capital Gains Taxation and Corporate Ownership

Estimation 3.5 3.6

Variable Coefficient (Std. Err.) Coefficient (Std. Err.) T axreform –0.0145∗∗∗ (0.004) –0.0049 (0.008) F amily 0.0026 (0.009) 0.0007 (0.012) lnSales 0.0075∗∗∗ (0.003) 0.0041 (0.004) P rofit –0.0012 (0.001) –0.0012 (0.006) Legal –0.0239 (0.037) –0.0382 (0.042) Age –0.0004∗ (0.000) –0.0005∗ (0.000) DivR –1.109 (0.765) –1.8438 (1.352) WBI –0.0198∗ (0.011) –0.0433∗∗ (0.017) Intercept -0.0889 (0.088) 0.0767 (0.084) Industry Effects no no Regional Effects no no

N 895 435 R2 overall 0.114 0.125

2 2 χ(25) χ(25) 77.10 39.63

Signiﬁcance levels : ∗ : 10% ∗∗ : 5% ∗ ∗ ∗ : 1%

Table 3.8: Estimation Results for Speciﬁcation 3.5 and 3.6

reform is negative and significant, supporting the hypothesis that the fraction of individual investors holding between 1 % and 10 % decreased after the tax reform act of 2001. Also the variables lnSales, Age and WBI remain significant factors of influence. The new variable P rofit is not significant for the sample. For specification 3.6 the sign of the coefficients are identical, but are not significant. This may be caused by the small sample size of 435 obervations.

To investigate different influence of profitability before and after the tax reform act of 2001, two variables are added in specification 3.7. I would expect that investors are more likely to sell unprofitable shares after the tax reform act

84 3 Capital Gains Taxation and Corporate Ownership as they can offset capital losses against other capital gains of the considered period. The dummy variable Loss is added, which turns 1 if the corporation has a negative change in sales and 0 if this change is positive. Additionally an interaction variable T axreform ∗ Loss is created, capturing whether the decrease in fraction of individuals holding between 1 % and 10 % is less for unprofitable firms, as here potential loss-offset can lead the taxpayer to defer the sale to periods after the tax reform. Therefore the variable Loss is expected to be negative and the variable T axreform ∗ Loss to be positive.

Estimation 3.7 Variable Coefficient (Std. Err.) T axreform –0.022∗∗∗ (0.005) lnSales 0.007∗∗ (0.003) Loss –0.007 (0.006) T axreformLoss 0.015∗∗ (0.007) F amily 0.003 (0.009) Legal –0.029 (0.037) DivR –1.099 (0.765) Age 0.000∗ (0.000) WBI –0.022∗∗ (0.011) Intercept –0.075 (0.087) Industry Effects no Regional Effects no N 895 R2 overall 0.1154

2 χ(26) 81.567

Signiﬁcance levels : ∗ : 10% ∗∗ : 5% ∗ ∗ ∗ : 1%

Table 3.9: Estimation Results for Speciﬁcation 3.7

Results depicted in table 3.9 show that the variable T axreform ∗ Loss is positive and signiﬁcant, which supports the theory that shares by unproﬁtable

85 3 Capital Gains Taxation and Corporate Ownership corporations are more likely to be sold after the tax reform. The variable Loss has the right sign but is not signiﬁcant.

All cross-correlations of explanatory variables of the sensitivity analyses are shown in tables A.12 - A.13 in the Appendix. No evidence for multicollinearity can be found.

Summarizing the results for ﬁrst hypothesis, support for hypothesis 1 can be found throughout the analyses. The tax reform act of 2001 lowered the fraction of individual investors holding shares of Austrian corporations significantly. Additionally, the size, the age of the corporation and general market development are signiﬁcant determinants of this shareholder type.

Tests of Hypothesis 2

To test the second hypothesis, the shareholder type of private foundations is used as the dependent variable. The variable F oundation is not normally distributed, as many corporations in the sample have no private foundations in their ownership structure. Additionally, if a private foundation is a shareholder, it often holds a substantial share of a corporation.

Table 3.10 shows that in 1999 only 14 companies of the sample had private foundations among their shareholders. This number is constantly increasing over the periods investigated. The mean percentage held by private foundations on the other hand is decreasing.

To account for this fact a binary variable is generated which is 1 if a ﬁrms shows private foundations in their ownership structure and 0 otherwise. With this variable a probit regression is estimated.

An additional variable is added to the investigation of private foundations: the variable IndividD which measures the overall percentage of individuals invested in a corporation, lagged by one year. I add this variable to investigate whether a corporation held by individuals the previous year rather shows a private foundation among its shareholders than other corporations.

The regression table 3.11 shows the results for speciﬁcation 3.8 using the probit regression. The last column shows the marginal eﬀects of the variables on the dependent variable in percent.

When investigating the determinants of private foundations as shareholders of Austrian corporations, one cannot ﬁnd a signiﬁcant impact looking at private

86 3 Capital Gains Taxation and Corporate Ownership

Foundations in the Sample Year Mean Std. Dev. Freq. 1999 0.750779 0.3168504 14 2000 0.740681 0.34173512 16 2001 0.733633 0.36865251 18 2002 0.705770 0.37709242 20 2003 0.672100 0.42257348 22 2004 0.663918 0.43374442 22 Total 0.706027 0.37841633 112

Table 3.10: Summary statistics of F oundation if F oundation ≥ 0

Estimation 3.8

Variable Coeﬀ. (Std. Err.) Marg. Eﬀ. T axreform 0.133 (0.171) 1.438 F amily 0.325∗∗ (0.126) 3.653∗∗

∗∗∗ ∗∗∗ IndividD –1.029 (0.145) –11.561 Legal 0.143 (0.389) 1.796 Age 0.004 (0.002) 0.041 DivR 3.618 (31.002) 0.406 WBI 0.079 (0.382) 0.892 Intercept –1.841 (0.762) Industry Eﬀects yes Regional Eﬀects yes N 1,187

2 χ(19) 144.35

Signiﬁcance levels : ∗ : 10% ∗∗ : 5% ∗ ∗ ∗ : 1%

Table 3.11: Estimation Results for Speciﬁcation 3.8

87 3 Capital Gains Taxation and Corporate Ownership foundations before or after the changes in tax law in 2001. This can be due to the fact that on the one hand the investment by individuals has become less attractive, but on the other hand additional taxes on private foundations may have also reduced the advantage of an investment via private foundations.

The coefficient of the variable controlling for family-owned businesses, F amily, is positive and significant. This indicates that the probability for the existence of a private foundation in the ownership structure of a corporation is higher for family-owned firms. This is consistent with the results of the summary statistics of section 3.2.3. When looking at the marginal effects, the results show that under specification 3.8 the probability that a family-owned corporation has a private foundation in its shareholder structure is 3.65% higher than for non-family firms.

A somewhat surprising result is shown for the variable IndividD: The higher the share of corporation held by individuals, the less likely a foundation is established in the subsequent year.

The legal form, the age of the corporation and the variables capturing general market development do not show signiﬁcant results.

The results do not support the second hypothesis that significantly more private foundations exist after the tax reform act of 2001. But results show that family-firms and firms held by less individual owners face a higher probability of having a private foundation in their ownership structure. Due to the fact that this sample contains very few corporations showing a private foundation further analyses to see whether the results are robust cannot be conducted. In any case, the regression results are in line with the summary statistics and therefore provide interesting information and point out future challenges of the investigation of ownership structure in Austria and smaller European countries.

3.2.5 Intermediate Summary

The Austrian tax reform 2001 reduced the threshold for substantial shareholdings from 10 % to 1 %. As a result, capital gains from selling shares between 1 % and 10 %, which were tax-exempt until 2000, became taxable in 2001. By 2011, even the 1%-threshold was abolished.

88 3 Capital Gains Taxation and Corporate Ownership

Because of the recent implementation of an expanded capital gains taxation, the investigation of the impact of individual capital gains taxation is essential to understand the impact on corporations, owners and tax revenues. The results show that the tax reform act of 2001 lowered the fraction of individual investors holding shares of Austrian corporations significantly. This suggests that individuals have adopted their investment strategy to avoid future taxation. This indicates that tax revenues may not rise as predicted by the govern- ment. Further the results show that size, age and general market development are significant determinants of this shareholder type. I therefore find support for the first hypothesis.

The analyses of private foundations as shareholders do not show significant reactions to the tax reform act of 2001. The second hypothesis that the tax reform act of 2001 leads to significantly more private foundations in the ownership structures of Austrian corporations has to be rejected. But it can be shown that family-ownership and the fraction of individuals invested in this corporation in the previous year are significant determinants of private foundations as shareholders.

This analysis diﬀers from prior studies by using a unique data set. I investigate non-listed corporations, as this is the majority of corporations in Austria. Additionally, I focus on family-owned ﬁrms and examine private foundations.

The analysis faces some restrictions, mainly due to sample size and observable variables. There is clearly demand for future research on the impact of capital gains taxation on corporate ownership in Austria and other small economies in Europe. Still, this third analysis of this doctoral thesis also supports the research area of capital gains taxation, as signiﬁcant impact on ownership structures can be found.

89 4 Conclusion

4 Conclusion

The influence of capital gains taxation on a company and its shareholders is of great interest in the fields of accounting and public finance research. Additionally, capital gains taxation is recently a matter of discussion in many European countries.

In most countries, interest payments for debt are tax-deductible at corporate level and thereby create an interest tax-shield while payments to equity investors are not deductible from the tax base. This causes a tax distortion to ﬁrm behavior, as debt becomes more attractive. Capital gains taxation increases the disadvantage of equity ﬁnancing of corporations as investors have to carry the extra costs of the tax burden. Additional taxes on capital gains could also lead to changes in the ownership structure of a corporation, as shareholders could sell shares or reorganize the ownership structure of a corporation. This may lead to lower tax revenue from capital gains taxation than expected.

Empirical investigations so far often only included corporate taxation when analyzing the impact of taxation on debt ratios or only used data from listed ﬁrms in the U.S. Almost no studies exist which investigate the impact of individual taxation on ownership structures of corporations. This doctoral thesis investigates the impact of capital gains taxation on corporate ﬁnancial policy and ownership structures and thereby aims to close this research gap.

Chapter 1 introduces to the topic of this doctoral thesis and provides the structure of the work. Chapter 2 investigates the impact of capital gains taxation. After a literature review in section 2.1, the tax reform 2001 in Austria, where the threshold for taxable capital gains was reduced from 10 % to 1 %, is anal- ysed in section 2.2. A model by Gordon and McKie-Mason (1990) is used and adjusted to the Austrian tax law to derive the hypothesis that capital gains taxation has an impact on debt ratios of Austrian firms. Empirical analyses are conducted for a unique sample of Austrian firms, including a large part of non-listed corporations. It is shown that the capital gains tax rate, the fraction of taxable investors of a corporation as well as the dividend payout ratio are significant determinants of the financing decisions of Austrian firms. Legal status, listing and corporate profitability also affect the debt ratio of corporations in Austria. Additionally, it is shown that family-owned companies behave

90 4 Conclusion differently from other corporations, indicating the importance of research on family businesses. Robustness checks accounting for different calculations of the effective tax rate on capital gains confirm these results.

Section 2.3 further adds to the research on the impact of individual taxation on corporate financial policy by investigating debt ratios in 13 CEE-countries during the years 2001 – 2009. In this period, many changes in tax rates occurred which offers an interesting opportunity for an empirical investigation. For each country and each year the net tax benefit of debt is calculated to analyze if the debt ratio is higher in countries with a higher net tax benefit of debt. The results show that debt ratios are higher for countries with a higher net tax benefit of debt. It is further shown that for example the profitability, the size, the existence of thin-capitalization rules and the age are significant determinants of the debt ratio.

The impact of individual capital gains taxation on corporate ownership is shown in chapter 3. Also for this research area a literature review is provided in section 3.1. In section 3.2 the impact of the tax reform 2001 in Austria on ownership structures of Austrian corporations is tested. This analysis contains a unique sample of Austrian firms. The results show that ownership structures changed after the tax reform act of 2001. The fraction of individual shareholders holding between 1 % and 10 % significantly decreased after 2001. For this shareholder type further significant influence of firm size, firm age and market indicators can be found. Further analyses of private foundations as shareholders of Austrian corporations show that whether a company is family- owned and the fraction of individuals invested in a corporation influences the appearance of this shareholder type.

The overall results of the three empirical analyses of this thesis emphasize how important it is to include individual capital gains taxation when investigating corporate financial policy and corporate ownership structures. The results show that corporations and individual investors react to changes in individual capital gains taxation to avoid taxation. This effect raises the question whether the expected additional tax revenues caused by capital gains taxation can be met. Furthermore, the fiscal authorities have to consider the influence on equity ratios when introducing or expanding capital gains taxation.

There is clearly demand for future research on the impact of capital gains taxation on debt ﬁnancing and ownership structures of corporations. The tax

91 4 Conclusion reform 2009 in Germany and the tax reform 2011 in Austria, which expanded the existing capital gains taxation, and several changes of the capital gains taxation in the U.S. in recent years would be further interesting research topics.

92 APPENDIX Table A.1: Cross-correlation Table for Speciﬁcation 1.1 g d Depr Nol P rofit T anAss CurAss lnSales Legal Quoted F amily W BI g τ 1.000 0.025 1.000 0.027 –0.106 0.0120.074 1.000 0.0030.011 0.025 0.0600.051 –0.134 –0.124 0.028 –0.319 0.004 0.183 1.000 0.003 –0.168 –0.067 –0.162 –0.077 0.040 –0.053 0.0730.022 0.187 1.000 –0.029 0.5060.109 0.111 –0.022 0.005 –0.143 1.000 0.044 –0.056 –0.065 –0.032 0.003 –0.102 –0.066 0.013 –0.041 0.130 0.059 –0.114 1.000 -0.033 –0.109 –0.016 –0.203 –0.175 –0.002 0.003 1.000 0.035 0.015 1.000 –0.075 –0.003 1.000 –0.041 –0.048 –0.031 –0.045 1.000 –0.003 –0.194 0.073–0.020 0.144 –0.123 –0.199 0.014 0.162 –0.036 –0.011 –0.017 –0.024 0.049 –0.005 1.000 –0.080 0.256 0.493 1.000 g Variables τ s d Depr Nol P rofit T anAss CurAss lnSales Legal Quoted F amily WBI A Appendix: Cross-correlation Tables

93 APPENDIX Table A.2: Cross-correlation Table for Speciﬁcation 1.2 g d Depr NOL P rofit T anAss CurAss lnSales Legal Quoted F amily W BI Inde Indf Indg Indi Indk g τ 1.000 0.025 1.000 0.027 –0.106 0.0120.0740.011 1.000 0.0030.051 0.060 0.025 –0.124 –0.134 0.028 0.0040.003 –0.319 0.183 –0.168 –0.162 1.000 –0.067 –0.077 –0.0530.022 0.040 0.187 0.0730.109 0.506 1.000 0.111 –0.022 –0.029 0.005 0.044 –0.143 –0.056 1.000 0.024 –0.032 0.003 –0.065 –0.066 0.211 0.013 –0.102 –0.064 –0.041 0.059 0.130 –0.051 –0.114 –0.033 –0.073 1.000 –0.109 0.074 –0.016 –0.203 –0.026 –0.002 –0.175 0.003 –0.018 1.000 0.035 –0.159 –0.095 0.015 –0.059 1.000 0.094 0.038 –0.053 –0.172 1.000 –0.075 –0.003 1.000 –0.041 –0.048 –0.031 –0.045 1.000 –0.003 –0.194 0.073–0.020 –0.123 0.144 0.014 –0.199 –0.036 0.162–0.005 –0.011 0.075–0.022 –0.017 –0.024 0.103 0.004 0.049 –0.005–0.008 0.000 0.023 –0.004–0.005 –0.080 –0.177 1.000 –0.084 –0.080 –0.048 0.061 0.014 0.256 0.085 0.008 –0.018 0.003 0.493 0.011 –0.018 –0.145 0.002 –0.050 1.000 –0.032 0.144 0.010 0.295 –0.002 –0.044 –0.088 0.101 –0.128 –0.176 –0.054 0.030 0.164 –0.032 0.183 0.308 –0.040 0.031 –0.004 –0.039 0.274 –0.010 1.000 –0.024 –0.158 –0.026 1.000 0.042 –0.006 –0.076 0.110 –0.245 –0.022 –0.082 –0.071 1.000 –0.024 –0.034 1.000 e f g i k g Variables τ s d Depr NOL P rofit T anAss CurAss lnSales Legal Quoted F amily WBI Ind Ind Ind Ind Ind

94 APPENDIX 2 e g τ Table A.3: Cross-correlation Table for Speciﬁcation 1.1 using s d Depr NOL P rofit T anAss CurAss lnSales Legal Quoted F amily W BI 2 e g τ 1.000 0.017 1.000 0.018 –0.106 0.0120.089 1.000 0.003 0.0250.045 –0.134 –0.124 –0.319 0.004 1.000 0.006 –0.168 –0.077 –0.162 –0.053 0.073 0.1870.024 –0.029 0.111 0.5060.494 1.000 –0.143 0.005 –0.022 –0.056 0.044 –0.065 -0-.032 0.003 –0.102 –0.066 0.013 –0.041 0.130 0.059 –0.114 1.000 –0.033 –0.109 –0.016 –0.203 –0.175 –0.002 1.000 0.003 0.035 0.015 1.000 –0.058 –0.003 1.000 –0.029 –0.048 –0.031 –0.045–0.001 1.000 0.060 0.028–0.007 0.183 –0.194 -0.067 0.073 0.040–0.003 0.144 –0.123 –0.199 1.000 0.014 0.162 –0.036 –0.011 –0.017 –0.024 0.049 –0.005 1.000 –0.080 0.256 0.493 1.000 2 e g Variables τ s d Depr NOL P rofit T anAss CurAss lnSales Legal Quoted F amily WBI

95 APPENDIX 3 e g τ Table A.4: Cross-correlation Table for Speciﬁcation 1.1 using s d Depr NOL P rofit T anAss CurAss lnSales Legal Quoted F amily W BI 3 e g τ 1.000 0.025 1.000 0.027 -0.106 0.0120.074 1.000 0.0030.011 0.025 0.0600.051 –0.134 0.028 –0.124 –0.319 0.004 0.183 1.000 0.003 –0.168 –0.067 –0.077 –0.162 0.040 –0.053 0.073 0.1870.022 1.000 –0.029 0.111 0.5060.109 1.000 –0.143 0.005 –0.022 –0.056 –0.065 0.044 –0.032 0.003 –0.102 –0.066 0.013 –0.041 0.130 0.059 –0.114 1.000 –0.033 –0.109 –0.016 –0.203 –0.175 –0.002 1.000 0.003 0.035 0.015 1.000 –0.075 –0.003 1.000 –0.041 –0.048 –0.031 –0.045 1.000 –0.003 –0.194 0.073–0.020 0.144 –0.123 –0.199 0.014 0.162 –0.036 –0.011 –0.017 –0.024 0.049 –0.005 1.000 –0.080 0.256 0.493 1.000 3 e g Variables τ s d Depr NOL P rofit T anAss CurAss lnSales Legal Quoted F amily WBI

96 APPENDIX 4 e g τ Table A.5: Cross-correlation Table for Speciﬁcation 1.1 using s d Depr NOL P rofit T anAss CurAss lnSales Legal Quoted F amily W BI 4 e g τ 1.000 0.025 1.000 0.027 –0.106 0.0120.074 1.000 0.0030.011 0.025 0.0600.051 –0.134 0.028 –0.124 –0.319 0.004 0.183 1.000 0.003 –0.168 –0.067 –0.077 –0.162 0.040 –0.053 0.073 0.1870.022 1.000 –0.029 0.111 0.5060.109 1.000 –0.143 0.005 –0.022 –0.056 0.044 -0.065 –0.032 0.003 –0.102 –0.066 0.013 –0.041 0.130 0.059 –0.114 1.000 –0.033 –0.109 –0.016 –0.203 –0.175 –0.002 1.000 0.003 0.035 0.015 1.000 –0.075 –0.003 1.000 –0.041 –0.048 –0.031 –0.045 1.000 –0.003 –0.194 0.073–0.020 0.144 –0.123 –0.199 0.014 0.162 –0.036 –0.011 –0.017 –0.024 0.049 –0.005 1.000 –0.080 0.256 0.493 1.000 4 e g Variables τ s d Depr NOL P rofit T anAss CurAss lnSales Legal Quoted F amily WBI

97 APPENDIX P rofit T otAss T anAss Age Quoted GDP L G 1.000 0.019 0.0030.025 0.003 0.0340.021 –0.001 0.1590.003 1.000 0.203 –0.002 0.132 0.354 0.100 1.000 –0.019 0.278 0.064 1.000 –0.016 1.000 –0.008 1.000 –0.002 0.016 1.000 Table A.6: Cross-correlation Table for Speciﬁcation 2.1 L P rofit T otAss T anAss Age Quoted GDP Variables G

98 APPENDIX NOL Depr P rofit T otAss T anAss Age Quoted GDP Table A.7: Cross-correlation Table for Speciﬁcation 2.2 L G 1.000 0.009 0.011 1.000 0.019 –0.0870.025 0.050 0.0150.021 0.003 0.009 –0.0190.003 –0.006 0.034 0.003 0.074 –0.001 1.000 0.159 0.001 0.203 –0.002 0.132 0.100 0.354 1.000 0.278 –0.019 1.000 0.064 –0.016 1.000 –0.022 1.000 –0.008 0.062–0.002 –0.000 0.024 1.000 –0.056 0.016 1.000 L NOL Depr P rofit T otAss T anAss Age Quoted GDP Variables G

99 APPENDIX P rofit T anAss T anAss Age Quoted GDP L G 1.000 0.046 0.0040.079 –0.1070.120 1.000 0.045 –0.0510.086 0.184 –0.062 1.000 0.085 0.244 0.024 0.135 1.000 0.140 0.194 0.325 –0.011 1.000 0.201 0.041 1.000 –0.041 1.000 Table A.8: Cross-correlation Table for Speciﬁcation 2.3 L P rofit T otAss T anAss Age Quoted GDP Variables G

100 APPENDIX P rofit T otAss T anAss Age Quoted GDP L G 1.000 0.046 0.0040.079 –0.107 1.000 0.120 0.045 –0.0510.086 0.184 –0.062 1.000 0.085 0.244 0.135 0.024 1.000 0.140 0.194 0.325 –0.011 1.000 0.201 0.041 1.000 –0.041 1.000 Table A.9: Cross-correlation Table for Speciﬁcation 2.4 L P rofit T otAss T anAss Age Quoted GDP Variables G

101 APPENDIX T hincap P rofit T otAss T anAss Age Quoted GDP 3 L G 2 L G Table A.10: Cross-correlation Table for Speciﬁcation 2.8 – 2.10 L G 1.000 0.847 1.000 0.906 0.886 1.000 0.045 0.004 0.068 1.000 0.019 0.0050.025 0.027 –0.0290.021 -0.005 -0.004 –0.0290.003 –0.005 0.066 0.003 0.091 0.012 0.003 0.063 0.034 –0.001 0.159 0.088 1.000 0.203 0.132 –0.002 0.100 1.000 0.354 0.278 –0.019 1.000 0.064 –0.016 1.000 –0.008 –0.006–0.002 –0.008 –0.022 –0.007 –0.006 1.000 0.047 0.016 1.000 2 3 L L L Variables G G G T hincap P rofit T otAss T anAss Age Quoted GDP

102 APPENDIX 1.000 0.0000.059 –0.0040.373 1.000 0.1830.523 –0.010 0.086 1.000 0.000 –0.017 0.014 0.000 1.000 0.058 –0.158 1.000 –0.015 1.000 T axreform F amily Legal Age DivR W BI 1.000 0.0000.059 0.0650.373 0.060 –0.0040.523 1.000 –0.009 0.183 –0.010 –0.013 0.086 0.000 1.000 –0.017 0.014 0.000 1.000 0.058 –0.158 1.000 –0.013–0.015 1.000 –0.144 1.000 T axreform lnSales F amily Legal Age DivR W BI Table A.11: Cross-correlation Table for Speciﬁcation 3.1 and 3.2 Table A.12: Cross-correlation Table for Speciﬁcation 3.3 and 3.4 Variables T axreform F amily Legal Age DivR WBI Variables T axreform lnSales F amily Legal Age DivR WBI

103 APPENDIX 1.000 0.006 0.0200.000 1.000 0.373 0.0650.059 –0.009 –0.0160.523 –0.004 0.010 0.060 1.000 –0.010 –0.013 –0.014 0.000 0.014 0.183 1.000 –0.017 0.086 0.000 0.014 –0.158 1.000 0.058 1.000 –0.013 1.000 –0.015 –0.144 0.066 1.000 T axreform lnSales P rofit F amily Legal Age DivR W BI Table A.13: Cross-correlation Table for Speciﬁcation 3.5 and 3.6 Variables T axreform lnSales P rofit F amily Legal DivR Age WBI

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