Between 1995 and 1999, Italy experienced three episodes of fiscal reform during which different categories of non-debt tax shields were introduced, including a classical investment tax credit, a system of dual income taxation, and an investment tax credit restricted to equity financed investments. Using the balance sheets of a large sample of Italian companies, we construct a data set which allows us to evaluate the impact of the different fiscal interventions. We apply MacKie-Mason's (1990) method to study incremental financing decisions using discrete choice analysis. The analysis shows that the measures introduced were successful in reducing the advantage of debt financing relative to equity financing. We relate the findings to the current literature on the determinants of capital structure.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Tax calculation will be finalised during checkout.
Subscribe to journal
Immediate online access to all issues from 2019. Subscription will auto renew annually.
Tax calculation will be finalised during checkout.
Altman, E. (1968). “Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy,” Journal of Finance 23, 589–609.
Alworth, J. and G. Arachi. (2001). “The Effect of Taxes on Corporate Financing Decisions: Evidence from a Panel of Italian Firms,” International Tax and Public Finance 8, 353–376.
Apel, M. and J. Sodersten. (1999). “Personal Taxation and Investment Incentives in a Small Open Economy,” International Tax and Public Finance 6, 79–88.
Bernardi, L. (2000). La Finanza Pubblica Italiana. Rapporto 2000. Bologna: Il Mulino.
Bodway, R. and N. Bruce. (1992). “Problems with Integrating Corporate and Personal Taxation in a Small Open Economy,” Journal of Public Economics 48, 39–66.
Bodway, R., N. Bruce and J. Mintz. (1984). “Taxation, Inflation, and the Effective Marginal Tax Rate on Capital in Canada,” Canadian Journal of Economics 17, 62–79.
Bond, S. (2000). “Levelling up or Levelling Down? Some Reflections on the ACE and CBIT Proposals, and the Future of the Corporate Tax Base.” In S. Cnossen (ed.), Taxing Capital Income in the European Union. Oxford, UK: Oxford University Press.
Bordignon, M., S. Giannini and P. Panteghini. (2001). “Reforming Business Taxation: Lessons from Italy?” International Tax and Public Finance 8, 191–210.
Bradley, M., G. Jarrell and E. H. Kim. (1984). “On the Existence of an Optimal Capital Structure: Theory and Evidence,” Journal of Finance 39, 857–878.
DeAngelo, H. and R. W. Masulis. (1980). “Optimal Capital Structure Under Corporate and Personal Taxation,” Journal of Financial Economics 8, 3–29.
De Bondt, G. J. (1998). “Financial Structure: Theories and Stylized Facts for Six EU Countries,” De Economist 146, 271–301.
de Miguel, A. and J. Pindado. (2001). “Determinants of Capital Structure: New Evidence from Spanish Panel Data,” Journal of Corporate Finance 7, 77–99.
Faini, R., G. Galli and C. Giannini. (1993). “Finance and Development: The Case of Southern Italy.” In A. Giovannini (ed.), Finance and Development: Issues and Experiences. UK: CEPR, Cambridge University Press.
Gammie, M. (ed.) (1991). Equity for Companies: A Corporation Tax for the 1990s. A Report of the IFS Capital Taxes Group. London: The Institute for Fiscal Studies, Commentary 26.
Gavana, G., A. Majocchi and A. Marenzi. (2001). “Gli effetti della riforma fiscale sui bilanci delle imprese manifatturiere,” Economia Pubblica 2, 65–96.
Givoly, D., C. Hahn, A. Ofer and O. Sarig. (1992). “Taxes and Capital Structure: Evidence from Firms' Response to the Tax Reform Act of 1986,” Review of Financial Studies 5, 331–355.
Gordon, R. H. and D. F. Bradford. (1980). “Taxation and the Stock Market Valuation of Capital Gains and Dividends,” Journal of Public Economics 14, 109–136.
Gordon, R. H. and J. K. Mackie-Mason. (1990). “Effects of the Tax Reform Act of 1986 on Corporate Financial Policy and Organizational Form.” In J. Slemrod (ed.), Do Taxes Matter: The Impact of the Tax Reform Act of 1986. Cambridge, MA: MIT Press.
Graham, J. R. (1996a). “Debt and the Marginal Tax Rate,” Journal of Financial Economics 41, 41–73.
Graham, J. R. (1996b). “Proxies for the Corporate Marginal Tax Rate,” Journal of Financial Economics 42, 187–221.
Graham, J. R. (1999). “Do Personal Taxes Affect Corporate Financing Decisions,” Journal of Public Economics 73, 147–185.
Jensen, M. C. (1986). “Agency Cost of Free Cash Flow, Corporate Finance and Takeovers,” American Economic Review 76, 323–329.
Jensen, M. C. and W. H. Meckling. (1976). “Theory of the Firm: Managerial Behavior Agency Cost and Ownership Structure,” Journal of Financial Economics 3, 305–360.
Keen, M. (2002). Tax Reform in Italy. Mimeo.
Mackie-Mason, J. K. (1990). “Do Taxes Affect Corporate Financing Decisions,” Journal of Finance 45, 1471–1493.
Marsh, P. (1982). “The Choice Between Equity and Debt: An Empirical Study,” Journal of Economics 37, 121–144.
Miller, M. H. (1977). “Debt and Taxes,” Journal of Finance 32, 261–275.
Modigliani, F. and M. H. Miller. (1958). “The Cost of Capital, Corporation Finance and the Theory of Investment,” American Economic Review 68, 261–297.
Monacelli, D., A. Staderini and S. Zotteri. (1999). “Uno Strumento per l'analisi del contributo alla crescita della tassazione dei redditi da capitale.” Ricerche Quantitative per la Politica Economica. Banca d'Italia, Roma.
Myers, S. C. (1977). “Determinants of Corporate Borrowing,” Journal of Financial Economics 5, 147–175.
Myers, S. and N. Majluf. (1984). “Corporate Financing and Investment Decisions When Firms have Information that Investors Do Not Have,” Journal of Financial Economics 13, 187–221.
Peri, G. (2002). “Settore finanziario in Italia: Contributo alla produttivitá e alla crescita.” Mimeo.
Rajan, R. and L. Zingales. (1998). “Financial Dependence and Growth,” American Economic Review 88, 559–586.
Scott, J. (1977). “Bankruptcy, Secured Debt, and Optimal Capital Structure,” Journal of Finance 32, 1–20.
Shevlin, T. (1990). “Estimating Corporate Marginal Tax Rates with Asymmetric Tax Treatment of Gains and Losses,” Journal of the American Taxation Association 12, 51–67.
Shum, P. M. (1996). “Taxes and Corporate Debt Policy in Canada: An Empirical Investigation,” Canadian Journal of Economics 29, 556–572.
Shyam-Sunder, L. and S. Myers. (1999). “Testing Static Tradeoff Against Pecking Order Models of Capital Structure,” Journal of Financial Economics 51, 219–244.
Sorensen, P. B. (Ed.) (1998). Tax Policy in the Nordic Countries. UK: Macmillan Press.
Titman, S. and R. Wessels. (1988). “The Determinant of Capital Structure Choice,” Journal of Finance 43, 1–19.
Trezevant, R. (1992). “Debt Financing and Tax Status,” Journal of Finance 43, 1557–1568.
US Department of Treasury. (1992). Integration of the Individual and Corporate Tax System: Taxing Business Income Once. Washington, D.C.
JEL Code: G32, H25
About this article
Cite this article
Bernasconi, M., Marenzi, A. & Pagani, L. Corporate Financing Decisions and Non-Debt Tax Shields: Evidence from Italian Experiences in the 1990s. Int Tax Public Finan 12, 741–773 (2005). https://doi.org/10.1007/s10797-005-2914-1
- non-debt tax shields
- investment tax credits
- dual income tax