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Thin Capitalization Rules and Entrepreneurial Capital Structure Decisions

  • Alexandra Maßbaum

    ()

    (University of Paderborn)

  • Caren Sureth

    ()

    (University of Paderborn)

Registered author(s):

    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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    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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    1. 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.
    2. Thiess Büttner & Michael Overesch & Ulrich Schreiber & Georg Wamser, 2006. "The Impact of Thin-Capitalization Rules on Multinationals’ Financing and Investment Decisions," CESifo Working Paper Series 1817, CESifo Group Munich.
    3. 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.
    4. 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.
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