How does the tax status of a country impact capital structure? Evidence from the GCC region

We investigate whether the tax status of a country has an impact on corporate capital structure. This research question is important and timely given that the empirical literature has not reached a consensus on the effect of taxes on corporate leverage. The Gulf Cooperation Council region, which is characterized by a unique fiscal environment, provides a natural laboratory for the analysis. We find that taxes have direct and indirect effects on leverage. The presence of taxes strengthens the effect of tangibility and GDP growth on leverage, while it weakens the effect of profitability and liquidity. The relationships between firms' growth opportunities and leverage and size and leverage do not seem to be affected by taxes. We also show that the effect of taxes is different by industry. Controlling for the tax status of the country is important in some industries and irrelevant in others.