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V JAIME FERNÁNDEZ DE ARAOZ CORPORATE FINANCE AWARD

The researchers Francisco Pérez-González (Mexico), Frédéric Panier (Belgium) and Pablo Villanueva (Mexico), are the authors of the paper which has won the fifth edition of the Award

A PAPER ON THE IMPACT OF INTRODUCING TAX SUBSIDIES FOR EQUITY, WINNER OF THE Vth JAIME FERNÁNDEZ DE ARAOZ CORPORATE FINANCE AWARD

Madrid, 20 June 2013.- The researchers and academics Francisco PérezGonzález (Mexico), Frédéric Panier (Belgium) and Pablo Villanueva (Mexican), have obtained the V Jaime Fernández de Araoz Corporate Finance Award, for their papel entitled “Capital Structure and Taxes: What Happens When You (Also) Subsidize Equity?”, which examines the use of tax incentives to stimulate the equity financing of companies. Francisco Pérez-González will receive the award this afternoon from H.R.H. the Prince of Asturias at CaixaForum Madrid.

Pérez-González lectures in Finance at the Graduate School of Business, Stanford University while Panier and Villanueva are researchers at the same institution.

Pérez-González has received numerous major prizes for his academic work and has covered subjects such as corporate governance, family businesses and corporate finance, amongst others. He is a researcher at the National Bureau of Economic Research (NBER).

“Capital Structure and Taxes: What Happens When You (Also) Subsidize Equity”, shows that tax policies which focus on encouraging the use of equity lead to lower levels of corporate debt, and therefore lower leverage and greater capitalisation.

The paper analyses the impact of a novel tax reform introduced in Belgium in 2006. This reform reduces tax deductions which foster indebtedness by allowing a tax deduction in relation to the company’s level of equity. Thus, unlike traditional tax incentives, the financing of companies receives a tax deduction regardless of the source of financing used and not just when companies are financed via debt.

Main conclusions:

  • Tax distortions to the detriment of equity have a significant impact on firms’ financing decisions. In particular, the introduction of a tax deduction in relation to companies’ equity levels leads to a significant reduction in the aggregate leverage of the economy as well as of the indebtedness as a percentage of firms’ assets.
  • Reduced levels of leverage have been found across the board. Both firms in existence before the reform and companies which started operating after the new tax regime came into force have increased equity levels as a source of financing.
  • Tax incentives for equity lead to a significant increase in the capitalisation of companies.
  • The reduced weight of debt as a percentage of all assets can largely be explained by a significant increase in firms’ equity levels and not by a reduction in the nominal value of their indebtedness.

The Jury ruled that “the winning study tackles one of the main subjects in corporate finance: the factors determining firms’ financial structure, in particular, the proportion of the two main components of assets, namely debt and equity.”

The Technical Committee of the Jury ruled that the study was technically sound and offered a fresh vision of the factors which determine firms’ capital structure.

Summary of the winining paper of the V Edition Jaime Fernández de Araoz Corporate Finance Award.

To read the complete paper please click here