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Capital Structure and International Debt Shifting

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  • Huizinga, Harry
  • Laeven, Luc
  • Nicodème, Gaëtan

Abstract

This paper presents a model that relates a multinational firm's optimal debt policy to taxation and to non-tax factors such as the desire to prevent bankruptcy. The model yields the predictions that a multinational's indebtedness in a country depends on national tax rates and differences between national and foreign tax rates. These differences matter as multinationals have an incentive to shift debt to high-tax countries. The predictions of the model are tested with the aid of a broad European data set combining firm-level data and information on the international tax treatment of dividend and interest streams. Corporate debt policy indeed appears to reflect national corporate tax rates and international corporate tax rate differences but not non-resident dividend withholding taxes.

Suggested Citation

  • Huizinga, Harry & Laeven, Luc & Nicodème, Gaëtan, 2006. "Capital Structure and International Debt Shifting," CEPR Discussion Papers 5882, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5882
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    More about this item

    Keywords

    corporate taxation; debt shifting; financial structure;

    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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