EFFECTS OF TAX INTEGRATION AND CAPITAL GAINS TAX ON CORPORATE LEVERAGE

This study investigates whether the adoption of integration in New Zea land and Canada had a significant impact on corporate financing decisi ons in those countries. Because Canada instituted a capital gains tax on the sale of stock concurrent with the adoption of integration, firm s within the Canadian samples believed to be affected by one of these tax changes and not the other are identified. Using regression analysi s, we substantiate that tax integration significantly reduced corporat e debt-to-equity ratios in New Zealand and Canada, supporting theoreti cal arguments that the imputation credit method of integration can red uce corporate financial leverage. However, this favorable impact is ve ry sensitive to changes in tax rates, particularly taxes on gains real ized through stock appreciation.