Taxation and capital structure choice—Evidence from a panel of German multinationals

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.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp06067.pdf Non-Technical SummaryWhile all companies will respond to taxation and capital market conditions with their financing and investment decisions, multinational companies seem to have enhanced opportunities. In particular, they may be able to structure their internal finances in order to save taxes. This channel of response to taxation has not only important implications for the revenue consequences of tax policy, but may also shape the response of multinationals' investment decisions to specific tax policy decisions.This paper investigates the effects of company taxation and capital market conditions on the financial structure of multinationals' foreign affiliates. A theoretical model considers the financing and investment decisions of a multinational corporation and derives empirical implications. More specifically, we model a company, active in two countries, which has the opportunity to use equity as well as external and internal debt. The theoretical modelshows that the effect of local taxes on leverage is positive for both channels of finance.The empirical implications are then investigated using a micro-level panel database 2003. In accordance with the theoretical predictions, the effect of local taxes on leverage is positive for both types of debt. Moreover, while adverse local credit market conditions are found to reduce external borrowing, internal debt is increasing, supporting the view that the two channels of debt finance are substitutes.

Tax and the Crisis*

“…For US multinationals, Desai, Foley and Hines (2004) find that leverage is higher in high-tax countries: a 10 per cent increase in the tax rate boosts the debt-asset ratio by 2.6 per cent. Very similar results have been obtained for European multinationals (Huizinga, Laeven and Nicodeme, 2008;Büttner et al, 2006;Mintz and Weichenrieder, 2005). At a more aggregate level, Devereux, Griffith and Klemm (2006) note that the proportion of inward direct investment taking the form of debt is greater the higher the statutory CIT rate.…”

Taxation and Capital Structure Choice: The Role of Ownership

“…However, this effect strongly depends on the size of the tax rate in the parent companies' country. Devereux () delivers a survey of this literature; among others, Buettner and Wamser (, ), Buettner et al . (, ), Huizinga et al .…”

Tax attractiveness and the location of German-controlled subsidiaries

“…By using the share of affiliates in a certain host country instead of employing the absolute figure, cases Next, we apply the amount of equity that German multinational enterprises locate in foreign countries as a dependent variable. A large strand of literature deals with the influence of taxation on corporate financing structures (see, e.g., Desai et al 2004;Huizinga et al 2008;Ramb and Weichenrieder 2005;Buettner et al 2009). The rationale behind these studies is that, in most countries, interest expenses are deductible for corporate tax purposes while dividends have to be paid out of profits after tax.…”