Abstract
Purpose: This study examines the impact of Italy’s 2008 interest barrier reform, which capped financing cost deductions at 30% of adjusted Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA), on the capital structure and tax strategies of private firms. It focuses on the differential effects across firm sizes, particularly small firms.
Design/Methodology/Approach: Using a difference-in-difference design, the study compares private firms above and below the 30% EBITDA threshold. The analysis employs robust matching techniques, such as the entropy balance method, to ensure comparability between treatment and control groups and minimize selection bias.
Findings: The reform reduced leverage in medium and larger firms, primarily through adjustments in long-term debt. However, smaller firms, constrained by financial inflexibility, increased their reliance on short-term liabilities. Furthermore, medium and larger firms maintained stable effective tax rates (ETR), while smaller firms experienced an increase.
Originality: This study contributes to the limited research on private firms’ tax sensitivity, particularly highlighting the structural disadvantages faced by smaller firms. It pro-vides novel evidence on how firm size influences responses to tax policy changes, ad-dressing a critical gap in the literature dominated by studies on public firms.
Practical Implications: Policymakers should consider the unequal effects of tax reforms on firms of different sizes. Targeted measures could alleviate the disproportionate burdens on smaller firms, supporting their financial stability and competitiveness.