Summary Of Journals Reviewing Tax Impacts Finance Essay - Free Essay Example

The journal provides a review about the impact of taxes on corporate financial behavior, focusing on the tax dimension of corporate finance. The decision of the firm to issue debt is based upon the risk-adjusted rate of return on debt between the common stock and municipal bonds. The demand for corporate debt curve is derived from the differential tax rates for individual investors. The greater the demand for corporate debt, the higher is the pretax interest rate. In Section 2, the author addressed the relationship between taxes and capital structure, focusing on the generalization of the Miller equilibrium. The Miller equilibrium assumes that firms will be indifferent toward in issuing debt whenever interest that is paid at the premium rate can reduce the level of corporate taxable income dollar. The marginal value of tax savings associated with debt financing is the parameter in managing capital structure. It involves both corporate and personal taxation of bond and common stock income. Section 3 is a review on the impact of taxes on dividend policy. Stocks with relatively high degrees of tax exposure sell so as to yield relatively high pre-tax expected rates of return in regards of dividends-tax effects. The section also focused on the possible role of tax avoidance by investors such as transforming dividends into a tax-deferred annuity and tax arbitrag e strategy. The author also discussed the attempt to reconcile the apparent conflict between the conditions of the original Miller equilibrium, where firms are indifferent to capital structure, and the conditions under which costless tax avoidance leads to an indifference by investors to dividends and capital gains. John R. Graham (2003). Taxes and Corporate Finance: A Review. The Review of Financial Studies Winter. Vol. 16, No. 4, pp. 1075Acirc; ±1129. The journal reviews about tax research related to areas like domestic and multinational capital structure, the payout and compensation policy, risk management, and last but not least earnings management. Under the domestic and multinational capital structure section, it reviews how corporate debt usage is positively affected by tax rates. For multinational capital structure, it is how international tax law can affect corporate financing decisions in a multinational firm. Under the payout policy section, the focus is on the ta x incentives related to corporate payout policy. The compensation policy section highlights the choice of salary versus equity compensation, the choice between incentive stock options (ISOs) and nonqualified stock options (NQOs), and also, the trade-off between compensation deductions and debt tax shields. Risk management section on the other hand investigates imperfections in the tax code that can lead to corporate hedging being beneficial and also explore how similar imperfections can provide an incentive to manage earnings. The last section, earnings management reviews the conditions that can lead to a tax incentive to smooth earnings. For each of these areas, the paper reviewed how taxes can affect corporate decision making and firm value and thus followed by a summary and discussion of the related empirical evidence and unresolved issues. Kerry Pattenden (2006). Capital Structure Decisions Under Classical and Imputation Tax Systems: A Natural Test for Tax Effects in Australi a. Australian Journal of Management, Vol. 31, No. 1, pp. 67Acirc; ±92. The journal investigates determinants of capital structure, which are mainly focus on tax incentives for debt financing. The reason for this examination is that, marginal tax rates play a deciding factor in the debt equity decision under a tax regime which favors debt over equity due to the potential size of the interest tax shield available. The hypothesis is that there should have a positive coefficient in the tax variable included. The analysis uses an experimental design and statistical technique which is the Bayesian selection methods to address key problems that might arise during empirical capital structure research. The paper also examines a panel of Australian firms that operated under two tax regimes which are classical regime and dividend imputation regime. The result shows that there is a significant positive tax coefficient in the classical regime, as hypothesized. Tax Effect on Malaysian companies and their capital structure decisions. (Mat Kila and Wan Mahmood, 2008) investigates the determinants of capital structure for the companies listed in the Bursa Malaysia Securities Berhad (BMSB) during the period from 2000 to 2005. The data are derived from financial statements of 17 companies by the DATASTREAM database. The authors analyzed dependent variable of debt ratio and the independent variables which are size, growth, liquidity and interest coverage ratio. To estimate the characteristics that will affect capital structure of Malaysian firms, they applied pooled OLS estimations. The result shows that the independent variables which included the size, liquidity and interest coverage ratio are significantly negative related to total debt. This may prove that larger firm employ equity financing or using itacirc;â‚ ¬Ã¢â€ž ¢s retained earnings as a major source in its capital structure. However, the study also shows insignificant negative capital structure to growth of the firm, which is expressed by the annual ch anges of earnings. The statistic shows of about 89.20% out of 17 sampled Malaysian firms for 6 year period use less than 30% debt in financing their activities. Meanwhile, the remaining firms which are 10.80% firms use more than 30% debt. In addition to that, 13 out of 17 sampled Malaysian firms are completely maintaining the usage of debt financing less than 30% for 6 year period of 2000 to 2005. Whereas only 4 companies, namely White Horse, Abric, Minply Holdings and Permaju Industries, are for a few years during the 6 years period of study use more than 30% debt ratio in financing its activities. Therefore, the result implies that most of Malaysian companies prefer to safeguard their control of their company by financing its operations with more equities compared to the usage of debt that exposed them to the fixed obligations toward creditors.