*Research Scholar, Department of Commerce, Delhi School of Economics, University of Delhi, Delhi, India
**Assistant Professor, Department of Commerce, Shri Ram College of Commerce, University of Delhi, Delhi, India
Online published on 7 May, 2014.
If corporate tax has positive impact on debt financing decision then how personal tax would influence the capital structure decision. Miller described impact of personal tax on financing decision. However, relation of personal tax and debt financing remains inconclusive for empirical works.
In this study, we examine the role of personal tax on equity return by consider Dividend Distribution Tax proxy for the same. With DDT, corporate tax is also taken into account to know the relative relation of both with capital structure choice of Indian Firms listed on NSE S&P CNX 500 equity index for a period of 15 years for 1997–2011. Firm tax liability creates only when profits are being earned and firms pay or propose to pay dividend out of profit so profitability is also considered as one of the explanatory variable with taxation.
Statistical Results show that given taxation variables are positively related with debt financing. Results are as per Miller, 1977 study which suggests a positive relation of corporate tax and personal tax on equity return with debt financing. Meanwhile, profitability has negative influence on debt financing decision of Indian firms which suggest Indian firms rely on pecking order theory of capital structure.
We also examine the above relation for various industries by classifying the whole sample size into various industries. The above relation between dependent variable and explanatory variable is not same for all industries.
Debt Ratio, Corporate Tax, Dividend Distribution Tax, Pecking order theory
