EFFECTS OF TAX INTEGRATION AND CAPITAL GAINS TAX ON CORPORATE LEVERAGE

This study investigates whether the adoption of integration in New Zealand and Canada had a significant impact on corporate financing decisions in those countries. Because Canada instituted a capital gains tax on the sale of stock concurrent with the adoption of integration, firms within the Canadian samples believed to be affected by one of these tax changes and not the other are identified. Using regression analysis, we substantiate that tax integration significantly reduced corporate debt-to-equity ratios in New Zealand and Canada, supporting theoretical arguments that the imputation credit method of integration can reduce corporate financial leverage. However, this favorable impact is very sensitive to changes in tax rates, particularly taxes on gains realized through stock appreciation.