Interest on equity and capital structure in the Brazilian context
Abstract
Purpose – The interest paid on own capital can benefit companies in the Brazilian capital market as
it can be considered a business expense and is, therefore, deductible as a corporate tax. The purpose of
this paper is to assess the impact of interest on equity (IOE) on capital structure decisions.
Design/methodology/approach – The initial sample consisted of 524 publicly traded companies
from different industries in the Brazilian capital market that were listed on Bovespa. Companies in the
finance, insurance and funds industries were excluded from the sample due to the unique features
of these financial intermediaries. Some companies in the initial sample were excluded due to a lack of
published data, inactivity during the sample period, etc. Thus, the paper excluded those companies
that did not have valid observations or failed to publish them. The final sample included 370
companies and covered the nine-year period from 1998 through 2006.
Findings – To this end, the authors identified the main determinants of capital structure and
analyzed, through panel data, the relationship of IOE in addition to other determinants of capital
structure, such as size, profitability, investment opportunities, risk, sales growth, real interest rate and
real exchange rate, in corporate debt. The novel contribution of this study is the inclusion and analysis
of the IOE in studies on the determination of capital structure of Brazilian companies. A new capital
structure scenario was created when Law No. 9.249/95 required changes in legislation, ceasing the
restatement of balance sheets and allowing companies to compensate their stockholders through IOE.
Before this change, companies could only benefit from the tax benefits of debt, using debt capital. Now,
they can also benefit from the use of equity because, by requiting equity through the IOE, deductions
of income tax and social contributions on net income are allowed by tax law because the IOE may be
considered a financial expense.
Originality/value: The authors were not able to find any other publication of a similar study in
a review of the extant empirical literature.
Keywords Capital structure, Interest on equity, Payout policy, Taxes
Paper type Research paper
Abstract
Purpose – The interest paid on own capital can benefit companies in the Brazilian capital market as
it can be considered a business expense and is, therefore, deductible as a corporate tax. The purpose of
this paper is to assess the impact of interest on equity (IOE) on capital structure decisions.
Design/methodology/approach – The initial sample consisted of 524 publicly traded companies
from different industries in the Brazilian capital market that were listed on Bovespa. Companies in the
finance, insurance and funds industries were excluded from the sample due to the unique features
of these financial intermediaries. Some companies in the initial sample were excluded due to a lack of
published data, inactivity during the sample period, etc. Thus, the paper excluded those companies
that did not have valid observations or failed to publish them. The final sample included 370
companies and covered the nine-year period from 1998 through 2006.
Findings – To this end, the authors identified the main determinants of capital structure and
analyzed, through panel data, the relationship of IOE in addition to other determinants of capital
structure, such as size, profitability, investment opportunities, risk, sales growth, real interest rate and
real exchange rate, in corporate debt. The novel contribution of this study is the inclusion and analysis
of the IOE in studies on the determination of capital structure of Brazilian companies. A new capital
structure scenario was created when Law No. 9.249/95 required changes in legislation, ceasing the
restatement of balance sheets and allowing companies to compensate their stockholders through IOE.
Before this change, companies could only benefit from the tax benefits of debt, using debt capital. Now,
they can also benefit from the use of equity because, by requiting equity through the IOE, deductions
of income tax and social contributions on net income are allowed by tax law because the IOE may be
considered a financial expense.
Originality/value: The authors were not able to find any other publication of a similar study in
a review of the extant empirical literature.
Keywords Capital structure, Interest on equity, Payout policy, Taxes
Paper type Research paper
Interest on equity and capital structure in the Brazilian context