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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Abstract: We investigate real investment, financial revenues and profits in formerly domestic firms once they enter a multinational entity (MNE) through an acquisition. We argue that following the acquisition, those targets are tax-optimized in a profit shifting context if they are acquired by MNEs with no controlled foreign corporation (CFC) rules in their headquarters' countries. In this case, we hypothesize that MNE-wide profit shifting opportunities decrease high-tax targets' cost of capital, which may have a positive effect on real investment of these targets. In addition, we hypothesize that financial revenues respectively profits of low-tax targets increase after the acquisition, since they may become destinations of profit shifting themselves. In line with the effects on real investment, profits of high-tax targets should decline. We find evidence for the effects on real investment. Further, these effects can no longer be observed in case of existing CFC rules in the acquirer's headquarters' country. This finding may suggest that CFC rules effectively mitigate MNE-wide profit shifting which in turn has detrimental investment effects. We also find some evidence for the expected effects for financial revenues but not for the profit measure. Impact of controlled foreign corporation rules on postacquisition investment and profit shifting in targets
No abstract
Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Abstract: In this paper, I investigate the influence of tax incentives on the financial structures of mergers and acquisitions (M&A) conducted by multinational entities (MNE). Previous research has already found evidence for tax avoidance by debt shifting. I analyze the importance of locating debt at holdings which own the operating firm. Placing debt at the level of the holding is more advantageous since it allows inter alia for debt financing up to the purchase price. Accordingly, by using firm-level data provided by the German Central Bank I show empirically that the probability that a firm is held by a holding in the same country increases with the tax rate in that country (though the effect is rather small). As a limitation, I find this effect only for a sample of all firms and no additional effect in case of M&As (denoted as M&A firms). Since this way of debt financing requires that interest payments of holdings are used to offset profits of the operating firms, I consolidate financial structures of holdings and the operating firms. I discuss theoretically and show with descriptive statistics that this consolidation -the major contribution of my paper -leads to a higher total debt ratio compared to the unconsolidated case. However, this effect can only be observed in particular for the subsample of those M&A firms which actually belong to such structures of holdings and operating firms and does not lead to an increase of the debt ratio in the sample of all M&A firms. Finally, I show that the tax sensitivity of external debt financing increases with the consolidation (though again with no additional effect in case of M&A firms). I conclude that those findings may be one explanation why previous studies have found relatively low effects of taxes on debt financing.
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