Book-tax differences and the capital structure: an analysis in the light of the pecking order theory

Abstract

The capital structure can be influenced by the book-tax differences (BTD). In the presence of a higher level of BTD, higher information quality and lower financing costs are expected. In the presence of a higher level of BTD, the quality of the information is expected to be higher and, consequently, lower financing costs. In this context, the objective of this research is to analyze the relationship between BTD and the capital structure of Brazilian public companies. The survey sample consists of 176 Brazilian public companies with data for the period from 2010 to 2015. The results for the panel analysis suggest that, in the presence of a lower BTD, Brazilian companies tend to increase financial leverage, indicating preference of companies by financing with third-party capital, demonstrating that in higher-risk environments, companies choose to finance themselves with third-party capital, since capital costs rise, which is in line with theory pecking order. In addition, it can be seen that the legal system (common law or code law) is not a determining factor in the relationship between BTD and financial leverage.