Economic Impact of Taxes On Financial Characteristics of the Natural Resources Industry

Abstract

The objective of this article is to investigate the effects of the Tax Reform Act of 1986 (TRA86) on financial characteristics of firms in the natural resources industry. Financial characteristics of the post-TRA86 period are compared with financial characteristics in the pre-TRA86 period in a multivariate analysis of covariance approach. The financial characteristics examined are the mode of asset acquisition and the method of external financing. The evidence suggests that tax law changes under TRA86 led to an increase in the proportion of operating assets acquired by lease rather than by purchase. The results failed to confirm the hypothesized effect of tax law changes on the mix of debt and equity in the capital structure. Marginal support is provided for the joint effect of the TRA86 changes and the firm's state of tax exhaustion. The results have tax policy implications regarding the influence of the alternative minimum tax and the tax wedge between debt and equity on business decisions.

Get full access to this article

View all access options for this article.

References

Aaron, H. 1968. The differential price effects of a value added tax. National Tax Journal 21 (2): 162-75.

Altshuler, R. , and A.J. Auerbach. 1990. The significance of tax law asymmetries: An empirical investigation. Quarterly Journal of Economics 105 (1): 61-86.

Carmer, S.G. , and M.R. Swanson. 1973. Evaluation of ten pair-wise multiple comparison procedures by Monte-Carlo methods. Journal of the American Statistical Association 68:66-74.

DeAngelo, H. , and R. Masulis. 1980. Optimal capital structure under corporate and personal taxation. Journal of Financial Economics 88 (8): 3-29.

Fullerton, D. 1986. The use of effective tax rates in tax policy. National Tax Journal 39 (3): 285-92.

Gordon, R.H. , and B. Malkiel. 1981. Corporation finance. In How taxes affect economic behavior, edited by H. J. Aaron and J. A. Pechman. Washington, DC: Brookings Institution.

Hall, R. , and D. Jorgenson. 1967. Tax policy and investment behavior. American Economic Review 57 (1): 391-414.

Heaton, H. 1987. On the bias of corporate tax against high-risk projects . Journal of Financial and Quantitative Analysis 22 (3): 366-71.

Litzenberger, R.H. , and E. Talmor. 1987. The irrelevancy of corporate taxes for capital structure and investment decisions. Journal of Accounting, Auditing, and Finance 4 (3): 305-16.

10.

Mackie-Mason, J.K. 1990. Do taxes affect corporate financing decisions? Journal of Finance 45 (5): 1471-93.

11.

Marsh, P. 1982. The choice between equity and debt: An empirical study . Journal of Finance 37 (1): 121-44.

12.

Moon, P. , and S. Hodges. 1989. Implications of the recent tax changes for corporate capital investment. Journal of Business, Finance, and Accounting 16 (1): 25-39.

13.

Myers, S.C. , and N.S. Majluf. 1984. Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics 13 (2):187-221.

14.

Poterba, J.M. 1986. Taxation and corporate capital structure. Comments prepared for the IV John Deutsch Roundtable of Economic Policy, The Impact of Taxation on Business Activity, Ottawa, November 11-13.

15.

Scheffé, H. 1959. The analysis of variance. New York : Wiley.

16.

Scholes, M.S. , and M.A. Wolfson. 1987. Issues in the theory of optimal structure . In Frontiers of modern finance, edited by S. Bhattacharya and G. Constantinides. Lanham: Rowman & Littlefield .

17.

Seigfried, J.J. 1974. Effective average U.S. corporation income tax rates. National Tax Journal 27 (2): 215-59.

18.

Spector, P.E. 1977. What to do with significant multivariate effects in multivariate analysis of variance. Journal of Applied Psychology 62 (2): 158-63.

19.

Steel, R.G.D. , and J.H. Torrie. 1980. Principles and procedures of statistics . New York: McGraw-Hill.

20.

Stickney, C.P. , and V.E. McGee. 1982. Effective tax rates: The effects of size, capital intensity, leverage, and other factors. Journal of Accounting and Public Policy 1 (2): 125-52.

21.

Sunley, E.M. , V.L. Amerkhail , and G.M. Spooner. 1988. The fall and rise of the U.S. corporate tax burden. National Tax Journal 41 (3): 272-84.

22.

Taub, A.J. 1975. Determinants of the firm's capital structure. Review of Economics and Statistics 57 (4): 410-6.

23.

Warshawsky, M.J. 1989. Tax reform and corporate capital structure. Public Finance 44 (2): 295-307.

24.

Winter, B.J. 1971. Statistical principles in experimental design. 2d ed. New York: McGraw-Hill .