TALLER #2: “MI TERRITORIO, DESDE LA CARTOGRAFIA”

Despite numerous empirical studies conducted in the real estate property sectors, the review of the literature on issues related to the capital structure of the listed real estate property enterprises reveals that there is currently limited literature on this theme and the studies completed may not be directly relevant. In addition, the vast majority of the researches are in the U.S, Canada and U.K context. In the U.S, studies have reached different conclusions on the impact of taxation on capital structure of real estate partnership and real estate investment trusts (REITs) such as the findings of Capozza and Seguin (1999), Howe and Shilling (1988), Maris and Elayen (1990). In Canada, Gau and Wang (1990) examine the capital structure of real estate investment at a project level. In the U.K, Barkham (1997) examines the financial structure and ethos of property companies. The main conclusion of the study is that the classification of property companies as property investment companies (PICs) and property trading companies (PTCs) is valid and the property

development firms borrow more than trading firms, as the former are believed to be riskier. Similarly, Ooi (1999a, b) studies capital structure and its determinants for property firms. The study concludes that large and profitable firms that undertake property trading and have more fixed assets tend to employ more long term debt. Westgaard et al. (2008) investigate the determinants of capital structure in 308 U.K real estate companies by using the accounting data from the fiscal years 1998-2006, and find that profitability, tangibility and size are positively related to leverage, while asset turnover and earnings variability are negatively related. The significant positive relationship of profitability contradicts major findings in the capital structure literature. More recently, Chiang, Chan and Hui (2002) study the capital structure and profitability of property and construction sector in Hong Kong. Their study concludes that profitability, cost of equity and capital structure is interrelated.

In Australia, most studies concentrate on the performances of the Australian Real Estate Investment Trusts (AREITs), formerly known as Listed Property Trusts (LPTs), under various aspects such as macroeconomic factors (West and Worthington, 2006), specific sections of the real estate industry such as retail (Newell and Hsu, 2007) and industrial (Newell and Feng, 2007). The impacts of taxation on the corporate financing pattern of real estate property enterprises have been neglected.

Because the ownership of real estate property may be as simple and straight- forward as ownership of the family home or an investment property by individuals, or as complex as ownership of investment properties through companies, trusts and unit funds, study on the AREITs alone do not provide adequate answers to how the Australian real estate property enterprises decide their corporate financing decision. This study aims at filling the gap by examining the combined effects of tax policies

and of the other determinants on the leverage decision making of the Australian listed real estate property enterprises, in the wake of the introduction of the New Tax System in 2000.

2.7

Hypotheses Development

Firms’ leverage levels may be affected by changes in the corporate tax, the personal tax structures, and relevant legislation that affects the ways in which firms run their businesses. The introduction of the New Tax System (NTS) changes both tax structures and the operation costs. Since firms differ with respect to their corporate tax attributes and because they may also differ with respect to the tax attributes of their security holders, a test of the trade-off and pecking order theories of capital structure should account for both effects. As reviewed in Chapter 2, the trade-off theory is concerned with the costs and benefits of taxes and the pecking order theory relates to the preferential source of funds the firm employ to finance its activities. To test this, ten testable hypotheses associated with ten research questions identified in Chapter One are proposed.

2.7.1 Impact of Corporate Taxes

The corporate tax structure favors the issuance of debt over equity since interest is deductible. Consequently, some of the theoretical analyses suggest that firms’ leverage increases with an increase in the corporate tax rate. This prediction is difficult to test since, at any given point in time, all corporations face the same statutory tax rate. However, leverage decisions are not based on the statutory tax rate, but rather on the marginal effective tax rate. The marginal effective tax rate, which is the present value of future tax payments arising from an additional dollar of taxable

income per year, varies across firms. This variation enables us to analyse the relation between leverage and corporate tax rates.

Cross-sectional differences in marginal effective tax rates result from different opportunities for tax deferral or tax reduction among firms, as well as from imperfect inter-period transfers of tax losses. A given change in the statutory tax rate brings about a greater change in the marginal effective tax rate of firms that initially have a higher marginal effective tax rate. Therefore, firms with a higher marginal effective tax rate will change their capital structure more than firms with a lower marginal effective tax rate in response to a given change in the statutory tax rate. The hypothesis regarding the effect of the reduction in the corporate tax rate, in the wake of the introduction of the New Tax System (NTS), is proposed as follows:

Hypothesis 1: At the firm level, there is a direct relationship between