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Thin Capitalization Rules and Entrepreneurial Capital Structure Decisions

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  • Alexandra Maßbaum

    ()
    (University of Paderborn)

  • Caren Sureth

    ()
    (University of Paderborn)

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    Abstract

    Tax planners often choose debt over equity financing. As this has led to increased corporate debt financing, many countries have introduced thin capitalization rules to secure their tax revenues. In a general capital structure model we analyze if thin capitalization rules affect dividend and financing decisions, and whether they can partially explain why corporations receive both debt and equity capital. We model the Belgian, German and Italian rules as examples. We find that the so-called Miller equilibrium and definite financing effects depend significantly on the underlying tax system. Further, our results are useful for the treasury to decide what thin capitalization type to implement.

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    File URL: http://www.business-research.org/2009/2/02accounting/2163/stoll1260783187.89.pdf
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    Bibliographic Info

    Article provided by German Academic Association for Business Research in its journal BuR - Business Research.

    Volume (Year): 2 (2009)
    Issue (Month): 2 (December)
    Pages: 147-169

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    Handle: RePEc:vhb:journl:v:2:y:2009:i:2:p:147-169

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    Related research

    Keywords: Miller equilibrium; business taxation; capital structure; critical income tax rate; financing decision; tax planning; thin capitalization;

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    1. Büttner, Thiess & Overesch, Michael & Schreiber, Ulrich & Wamser, Georg, 2008. "The impact of thin-capitalization rules on multinationals' financing and investment decisions," Discussion Paper Series 1: Economic Studies 2008,03, Deutsche Bundesbank, Research Centre.
    2. DeAngelo, Harry & Masulis, Ronald W, 1980. " Leverage and Dividend Irrelevancy under Corporate and Personal Taxation," Journal of Finance, American Finance Association, vol. 35(2), pages 453-64, May.
    3. Boadway, R. W. & Bruce, N., 1979. "Depreciation and interest deductions and the effect of the corporation income tax on investment," Journal of Public Economics, Elsevier, vol. 11(1), pages 93-105, February.
    4. DeAngelo, Harry & Masulis, Ronald W., 1980. "Optimal capital structure under corporate and personal taxation," Journal of Financial Economics, Elsevier, vol. 8(1), pages 3-29, March.
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