On the Capital Structure of Foreign Subsidiaries: Evidence from Panel Data Quantile Regression Models

This paper investigates how business taxation and profitability affect the capital structure of European subsidiaries controlled by foreign multinational corporations. While traditional financial theories, such as the Pecking Order Theory (POT) and Trade-Off Theory (TOT), offer contrasting predictions – emphasizing, respectively, the irrelevance or centrality of tax factors – neither fully accounts for multinational settings or firm heterogeneity. Using a large panel dataset from Orbis, we analyze 70,160 subsidiaries across 29 countries. To overcome limitations of standard linear panel models, we estimate the Unconditional Quantile Partial Effects (UQPE) adjusting for fixed or correlated random effects. Our results show that corporate tax effects are heterogeneous across the leverage distribution. Specifically, subsidiary tax rates positively influence leverage, particularly in the lower deciles of the distribution. Parent company tax rates exhibit an inverse relationship, mainly affecting the lowest deciles of the leverage distribution. Profitability reduces leverage across all quantiles, according to the POT and some TOT models. Additionally, other firm characteristics (e.g. asset structure, liquidity, and firm size) display quantile-specific effects on leverage. Quite importantly, taxes affect companies’ capital structure in heterogeneous ways. With our findings we show that average marginal effects mask substantial heterogeneity. This research contributes to the ongoing tax policy debate by providing empirical evidence that underscores the importance of firm-specific factors and the need for tailored policy approaches in corporate finance. As we show, tax incentives have the strongest impact on the lowest levels of leverage, while the higher levels are much less responsive, probably because of the constraints faced by heavily indebted companies. Policymakers should consider these differential effects to design targeted tax policies that effectively influence corporate financing decisions.