Capital Structure or Debt Tax Shielding Ratio? An Empirical Investigation for Indonesia Firms
Abstract
So far research on capital Structure choice has yielded little support for the tradeoff
theory of capital structure choice.Berens and Cunny (1995) argue that most of the existing
research is not suited for investigating the relevance of this theory, as firms can avoid tax
payments completely without being fully debt financed. It would therefore be more
appropriate to consider the extent to whichfirms avoid taxes, their so-called debt tax shielding
ratio, rather than their leverage. It could then also be argued that the theoretical determinants
of capital structure choice should explain firms' debt tax shielding ratios. In this thesis writer
investigate whether the tradeoff theory can explain the variance in debt tax shielding by
Indonesian Firms. The results provide supports for the tradeoff theory than traditional
research on the determinants of capital structure.
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