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The Impact of Thin-Capitalization Rules on Multinationals’ Financing and Investment Decisions

  • Thiess Büttner
  • Michael Overesch
  • Ulrich Schreiber
  • Georg Wamser

This paper analyzes the role of Thin-Capitalization rules for capital structure choice and investment decisions of multinationals. A theoretical analysis shows that the imposition of such rules tends to affect not only the leverage and the level of investment but also their tax-sensitivity. An empirical investigation of leverage and investment reported for affiliates of German multinationals in 24 countries in the period between 1996 and 2004 offers some support for the theoretical predictions. While Thin-Capitalization rules are found to be effective in restricting debt finance, investment is found to be more sensitive to taxes if debt finance is restricted.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2006/wp-cesifo-2006-10/cesifo1_wp1817.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1817.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1817
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  1. Jeffrey MacKie-Mason, 1988. "Do Taxes Affect Corporate Financing Decisions?," NBER Working Papers 2632, National Bureau of Economic Research, Inc.
  2. Luc Laeven & Harry Huizinga & Gaetan Nicodeme, 2007. "Capital Structure and International Debt Shifting," IMF Working Papers 07/39, International Monetary Fund.
  3. Bucovetsky, Sam & Haufler, Andreas, 2008. "Tax competition when firms choose their organizational form: Should tax loopholes for multinationals be closed," Journal of International Economics, Elsevier, vol. 74(1), pages 188-201, January.
  4. Thiess Buettner & Michael Overesch & Ulrich Schreiber & Georg Wamser, 2006. "Taxation and Capital Structure Choice – Evidence from a Panel of German Multinationals," CESifo Working Paper Series 1841, CESifo Group Munich.
  5. Eckhard Janeba & Michael Smart, 2001. "Is Targeted Tax Competition Less Harmful than its Remedies?," CESifo Working Paper Series 590, CESifo Group Munich.
  6. Gordon, Roger H. & Lee, Young, 2001. "Do taxes affect corporate debt policy? Evidence from U.S. corporate tax return data," Journal of Public Economics, Elsevier, vol. 82(2), pages 195-224, November.
  7. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
  8. Paolo Panteghini, 2006. "The Capital Structure of Multinational Companies under Tax Competition," CESifo Working Paper Series 1721, CESifo Group Munich.
  9. Xavier WAUTHY & Susana PERALTA & Tanguy VAN YPERSELE, . "Should Countries Control International Profit Shifting?," EcoMod2004 330600158, EcoMod.
  10. Keen, Michael, 2001. "Preferential Regimes Can Make Tax Competition Less Harmful," National Tax Journal, National Tax Association, vol. 54(n. 4), pages 757-62, December.
  11. Auerbach, Alan J., 2002. "Taxation and corporate financial policy," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 19, pages 1251-1292 Elsevier.
  12. Jack Mintz & Alfons Weichenrieder, 2005. "Taxation and the Financial Structure of German Outbound FDI," CESifo Working Paper Series 1612, CESifo Group Munich.
  13. Mihir A. Desai, 2005. "The Degradation of Reported Corporate Profits," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 171-192, Fall.
  14. Mihir A. Desai & C. Fritz Foley & James R. Hines, Jr., 2003. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," NBER Working Papers 9715, National Bureau of Economic Research, Inc.
  15. Jack M. Mintz & Michael Smart, 2001. "Income Shifting, Investment, and Tax Competition: Theory and Evidence from Provincial Taxation in Canada," International Tax Program Papers 0402, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto, revised Apr 2003.
  16. Gravelle, Jane G., 2004. "The Corporate Tax: Where Has It Been and Where Is It Going?," National Tax Journal, National Tax Association, vol. 57(4), pages 903-23, December.
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