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

Which one of the following do you expect to find for the average capital structure, i.e., the average value of D/(D+E), in your sample?

a. 0 < Average value of D/(D+E) < 1

b. Average value of D/(D+E) = 0

c. Average value of D/(D+E) = 1

d. None of the above