Influence of Corporate Taxation on the Financial Leverage of Czech, Polish and Russian Companies

• Main Authors: Irena Jindrichovska, Vyacheslav Moskalchuk
• Format: Article
• Language: English
• Published: National Research University Higher School of Economics 2019-09-01
• Series: Корпоративные финансы
• Subjects: financial leverage; capital structure; corporate taxation; debt financing of projects; effective tax rate; interest coverage ratio; company materiality level; cost of debt; interest coverage level; pooled-regression; between-regression; fixed effects within-regression
• Online Access: https://cfjournal.hse.ru/article/view/10212/11058

This article aims to compare and contrast the available empirical evidence concerning the capital structure of Polish, Czech and Russian companies. This is an intriguing research area due to the fact that the Czech and Polish economies began their transition to the market economy contemporaneously with Russia, and so along with other cultural and historical parallels, the data is comparable. We compare data from a selection of large companies from the selected territories and investigate whether effective tax rate is significant determinant of capital structure. The selected sample is comprised of 69 companies (50 from Russia, 9 from Poland, and 10 from Czech Republic), using data over a period of fourteen years. We perform a regression analysis and interpret the results using theoretical knowledge as articulated in the academic literature. The dependent variable in all tested regressions is financial leverage, calculated as the ratio of the sum of short-term and long-term debts to the sum of short-term and long-term assets. Other variables evaluated include interest coverage ratio, the level of company tangibility, and the cost of debt. This set of input values was uploaded from the Bloomberg database.Our results indicate that taxation does have determining effect on the choice of a certain level of leverage. Moreover, the effective tax rate represents the most important factor in determining the model of capital structure utilised by large companies in each country studied. We establish the dependence of capital structure models on the level of corporate tax applied in each country and identify a set of additional determinants which play a significant role. This paper’s novelty may be summarised as representing an advanced understanding of specific aspects of influence of the corporate taxation on the capital structure of companies in Russia and other economies of the former Eastern Bloc. This paper shines a new light on the subject area by extending the duration of the studied data beyond previous research, to fourteen years. As such, in this paper we present a comparitive dynamic which may be mapped on to other similar comparitive studies. Our results will be of interest in professionals and academics who are involved in the fields of taxation, debt and equity in Eastern Europe and Russia. The schema utilised here may be applied in a similar manner to examine the development of similar economies in Eastern Europe and further afield.