A Review on the Relevance and Impact of Borrowing and Taxes to Firm Value

Hafezali Iqbal Hussain, Mohd Farid Shamsudin, Milad Abdelnabi Salem, Azlan Ali

Abstract


This paper provides a critical review on the relevance and impact of capital structure decisions and its tax implications on firm value. We provide a brief look at the fundamental theoretical predictions from a basic framework established in the literature. Furthermore, we discuss the implications of one of the most important market imperfections: taxes. This is driven by the tax shield provided by debt issues as well as the impact income taxes at the personal investor level. The empirical literature does provide reasonable evidence to support the framework. However, further studies highlight that it remains puzzling why managers are reluctant to increase debt levels to reduce firms‟ tax burden given that the potential savings remain largely underutilized in practice. The evidence in the empirical literature provides contention which questions the fundamental framework of the theory as it remains unresolved as to whether debt issues do have a net marginal tax benefit to firm value.

Aus. J. Acc. Eco. Fin. Vol 1(1), October 2015, P 1-15


Keywords


Borrowing; Firm value; Taxes

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