Agency and Tax Explanations of Security Issuance Decisions

This paper is an empirical examination of the relative roles of agency and tax considerations in corporate debt versus equity issuance decisions. Unlike earlier work, we conduct our tests on a sample of UK firms since the UK system of taxation does not create an obvious tax advantage to debt and hence affords an opportunity to evaluate the relevance of tax arbitrage considerations. We find that both tax and agency issues are important determinants of security issuance decisions. In addition, we demonstrate that our specification is robust to a variety of alternative explanations which have appeared in the empirical literature.