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The Impact of Thin-Capitalization Rules on External Debt Usage – A Propensity Score Matching Approach

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Author Info
Georg Wamser ()

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Abstract

This paper analyzes how multinational enterprises respond to a restriction on interestdeductions incurred for internal borrowing. The emphasis of the study is on a firm’sresponse with respect to external borrowing. The empirical investigation appliespropensity score matching techniques and exploits the 2001 reform of the German thin-capitalizationrule to solve endogeneity problems. The results suggest that restrictionson internal debt are associated with expansions in external debt finance, indicating asubstitutional relationship. Since multinational enterprises can use internal debt to shiftprofits from high- to low-tax countries, this finding implies that policies aimed atsecuring corporate tax revenue possibly fail and should be subject to careful scrutiny bypolicymakers.

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Publisher Info
Paper provided by Ifo Institute for Economic Research at the University of Munich in its series Ifo Working Paper Series with number Ifo Working Paper No. 62.

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Date of creation: 2008
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Handle: RePEc:ces:ifowps:_62

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Find related papers by JEL classification:
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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    Other versions:
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  4. Rajeev H. Dehejia & Sadek Wahba, 2002. "Propensity Score-Matching Methods For Nonexperimental Causal Studies," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 151-161, February. [Downloadable!] (restricted)
    Other versions:
  5. Ramb, Fred & Weichenrieder, Alfons J, 2005. "Taxes and the financial structure of German inward FDI," Discussion Paper Series 1: Economic Studies 2005,05, Deutsche Bundesbank, Research Centre. [Downloadable!]
    Other versions:
  6. MacKie-Mason, Jeffrey K, 1990. " Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-93, December. [Downloadable!] (restricted)
    Other versions:
  7. Alfons Weichenrieder & Helen Windischbauer, 2008. "Thin-Capitalization Rules and Company Responses Experience from German Legislation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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    Other versions:
  16. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May. [Downloadable!] (restricted)
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    Other versions:
  18. 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. [Downloadable!]
    Other versions:
  19. John R. Graham, 2000. "How Big Are the Tax Benefits of Debt?," Journal of Finance, American Finance Association, vol. 55(5), pages 1901-1941, October. [Downloadable!] (restricted)
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