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Capital Structure and International Debt Shifting

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  • Mr. Luc Laeven
  • Harry Huizinga
  • 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 because 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. Our 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 our understanding of how corporate debt policy is set in an international context.

Suggested Citation

  • Mr. Luc Laeven & Harry Huizinga & Gaetan Nicodeme, 2007. "Capital Structure and International Debt Shifting," IMF Working Papers 2007/039, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2007/039
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    More about this item

    Keywords

    WP; capital structure; multinational firm;
    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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