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Corporate Taxes and Internal Borrowing within Multinational Firms

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  • Peter Egger
  • Christian Keuschnigg
  • Valeria Merlo
  • Georg Wamser

Abstract

This study develops a theoretical model of a multinational firm with an internal capital market. Hypotheses regarding the role of local versus foreign characteristics such as profit tax rates, lack of institutional quality, financial underdevelopment, and productivity for internal debt financing at the level of foreign affiliates are derived and assessed empirically in a panel dataset covering the universe of German multinationals. We show that differences in nontax incentives given by fundamentals in local and foreign markets can offset or reinforce tax incentives. The results point at a many times higher tax-sensitivity of internal debt financing compared to previous research.

Suggested Citation

  • Peter Egger & Christian Keuschnigg & Valeria Merlo & Georg Wamser, 2014. "Corporate Taxes and Internal Borrowing within Multinational Firms," American Economic Journal: Economic Policy, American Economic Association, vol. 6(2), pages 54-93, May.
    • Handle: RePEc:aea:aejpol:v:6:y:2014:i:2:p:54-93
    Note: DOI: 10.1257/pol.6.2.54
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    More about this item

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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