Corporate Financing & Taxation: A Dynamic Panel Data Modelling

Do prevailing corporate tax rates have any significant impact on corporate financing decision? This is the most controversial question in corporate finance. Theories suggest a positive impact of corporate tax on debt financing as interest is a tax deductible expense and many empirical studies favour this. However, factors dominating in Emerging economies differ from those in developed economies as the priorities of the two are different. Under situation where external capital inflow plays a vital role in the development of the economy, it would be interesting to see whether corporate tax maintains its dominating position as suggested by earlier studies. This paper examines this issue in detail through dynamic panel data model for firms in India.