Tax policy and firms’ financing decisions: Empirical evidence from the Dominican Republic

Abstract

Numerous studies have tried to explain the financial behaviour of firms based on different theories. Despite the vast and rich literature, only in the last decade has attention also been focused on emerging economies. In the first place, the purpose of this paper is to investigate the determinants of the capital structure in an emerging economy, such as that of the Dominican Republic, testing the sustainability of the trade-off and pecking order theories. Secondly, we also investigated the impact of tax policy on the financial behaviour of businesses. In this perspective, this study overcomes the distorting problems associated with estimating the tax variable, as it uses data from each company’s tax returns. The data were provided by the Ministry of Finance to the World Bank as part of a collaboration on the analysis of fiscal policy. A fixed-effects (FE) estimation technique has been employed to analyse the financial structure of companies. Overall, the results show that the individual determinants have a strong ability to explain the capital structure of companies, also highlighting that, in some cases, the fiscal variable influences the financial behaviour of companies.