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Suppose we are in a world where capital markets are NOT perfect (i.e., there are taxes, defaults, etc). You have a large sample of firms
Suppose we are in a world where capital markets are NOT perfect (i.e., there are taxes, defaults, etc). You have a large sample of firms from different countries. Each country has different corporate tax rates and, therefore, the firms in your sample face different tax rates. Let T denote the corporate tax rate faced by each firm. You are interested in understanding the effect of corporate taxes on the firms optimal capital structure and, therefore, run the following regression: D/(D+E) = b + m * T
According to the trade-off theory of capital structure, which one of the following do you expect to find for your estimate of the coefficient m: a. m<0 AND statistically significant b. m<0 AND statistically significant c. The correlation between D/(D+E) and T is not statistically significant d. m=0 AND statistically significant
Suppose we are in a world where capital markets are NOT perfect (i.e., there are taxes, defaults, etc). You have a large sample of firms from different countries. Each country has different corporate tax rates and, therefore, the firms in your sample face different tax rates. Let T denote the corporate tax rate faced by each firm. You are interested in understanding the effect of corporate taxes on the firms optimal capital structure and, therefore, run the following regression: D/(D+E) = b + m * T
According to the trade-off theory of capital structure, which one of the following do you expect to find for your estimate of the coefficient m:
a. m<0 AND statistically significant
b. m<0 AND statistically significant
c. The correlation between D/(D+E) and T is not statistically significant
d. m=0 AND statistically significant
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