Capital Structure of IPOs and Seasoned Firms Under an Imputation System

This paper examines the relationship between tax status and capital structure while controlling for company history. The capital structure of a sample of IPOs is compared to seasoned companies as it is argued that the capital structure of IPOs is not as affected by the history of decisions and experiences as that of seasoned firms. Thus any link between tax optimisation and capital structure is more likely to be identified in IPO firms. Australia however, unlike many parts of the world, has had a full dividend imputation system since 1987. This theoretically at least should remove any bias between the use of debt and equity for taxpaying companies, while the bias remains for non-taxpaying companies unable to take advantage of the tax saving from debt. We find that non-taxpaying IPOs have significantly lower levels of debt than taxpaying IPOs, a result consistent with the tax incentive hypothesis.