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Corporate taxation, debt financing and foreign-plant ownership

  • Egger, Peter
  • Eggert, Wolfgang
  • Keuschnigg, Christian
  • Winner, Hannes

This paper compares domestically and foreign-owned plants with respect to their debt-to-assets ratio and analyzes to which extent the difference is systematically affected by corporate taxation. To derive hypotheses about influence of corporate taxation on a firm's debt financing we adapt a standard model of taxation and financing decisions of firms for the case of international debt shifting activities of foreign-owned firms. We estimate the average difference between a foreign-owned and a domestically owned firm's debt ratio, treating the mode of ownership as endogenous. Using data from 32,067 European firms, we find that foreign-owned firms on average exhibit a significantly higher debt ratio than their domestically owned counterparts in the host country. Moreover, this gap in the debt ratio increases with the host country's statutory corporate tax rate.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 54 (2010)
Issue (Month): 1 (January)
Pages: 96-107

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Handle: RePEc:eee:eecrev:v:54:y:2010:i:1:p:96-107
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