Arbeitspapier

Thin Capitalization Rules and Multinational Firm Capital Structure

This paper examines the impact of thin capitalization rules that limit the tax deductibility of interest on the capital structure of the foreign affiliates of US multinationals. We construct a new data set on thin capitalization rules in 54 countries for the period 1982-2004. Using confidential data on the internal and total leverage of foreign affiliates of US multinationals, we find that thin capitalization rules affect multinational firm capital structure in a significant way. Specifically, restrictions on an affiliate’s debt-to-assets ratio reduce this ratio on average by 1.9%, while restrictions on an affiliate’s borrowing from the parent-to-equity ratio reduce this ratio by 6.3%. Also, restrictions on borrowing from the parent reduce the affiliate’s debt to assets ratio by 0.8%, which shows that rules targeting internal leverage have an indirect effect on the overall indebtedness of affiliate firms. The impact of capitalization rules on affiliate leverage is higher if their application is automatic rather than discretionary. Furthermore, we show that thin capitalization regimes have aggregate firm effects: they reduce the firm’s aggregate interest expense bill but lower firm valuation. Overall, our results show than thin capitalization rules, which thus far have been understudied, have a substantial effect on the capital structure within multinational firms, with implications for the firm’s market valuation.

Sprache
Englisch

Erschienen in
Series: CESifo Working Paper ; No. 4695

Klassifikation
Wirtschaft
Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
Business Taxes and Subsidies including sales and value-added (VAT)
Thema
thin capitalization rule
multinational firm
capital structure
taxation

Ereignis
Geistige Schöpfung
(wer)
Blouin, Jennifer
Huizinga, Harry
Laeven, Luc
Nicodème, Gaëtan
Ereignis
Veröffentlichung
(wer)
Center for Economic Studies and ifo Institute (CESifo)
(wo)
Munich
(wann)
2014

Handle
Letzte Aktualisierung
10.03.2025, 11:46 MEZ

Datenpartner

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Objekttyp

  • Arbeitspapier

Beteiligte

  • Blouin, Jennifer
  • Huizinga, Harry
  • Laeven, Luc
  • Nicodème, Gaëtan
  • Center for Economic Studies and ifo Institute (CESifo)

Entstanden

  • 2014

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