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Capital structure and international debt shifting

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  • Harry Huizinga
  • Luc Laeven
  • Gaetan Nicodeme

Abstract

This paper presents a model of a multinational firm's optimal debt policy that incorporates international taxation factors. The model yields the prediction that a multinational firm's indebtedness in a country depends on a weighted average of 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 using a novel firm-level dataset for European multinationals and their subsidiaries, combined with newly collected data on the international tax treatment of dividend and interest streams. The empirical results show that corporate debt policy indeed not only reflects domestic corporate tax rates but also differences in international tax systems. These findings contribute to understanding how corporate debt policy is set in an international context.

Suggested Citation

  • Harry Huizinga & Luc Laeven & Gaetan Nicodeme, 2006. "Capital structure and international debt shifting," European Economy - Economic Papers 2008 - 2015 263, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0263
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    More about this item

    Keywords

    corporate taxation; financial structure; debt shifting; corporate debt policy; capital structure; Huizinga; Laeven; Nicodeme;
    All these keywords.

    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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