Firm-level investment, financing choices and corporate taxation management: evidence from panel of non-financial firms

This paper investigates the relationship between firm's financing choices, taxation benefits and investment in Pakistani listed firms. We apply the system generalised method of moments regression estimation on a sample of firms listed on Pakistan Stock Exchange during the period from 2001-2014. Our findings are that there is a positive relationship between leverage and investment accruing from the use of tax shield benefits which also are positively associated with the firm-level investment. Equity is also positively related to investment but the effect of leverage is more pronounced than equity. We also find that the positive relation between leverage and investment is stronger for firms with a medium level of debt, consistent with the trade-off theory argument of the existence of an optimal level of debt. Our results support the hypothesis that firms utilise debt to supplement investment in circumstances where alternate mechanisms of finance are not well developed.