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Effects of taxation on European multi-nationals’ financing and profits

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  • Stefan Lutz

Abstract

Important determinants of multinational firms’ choice of location include, besides resource cost and infrastructure, the taxation regime through its effects on international pricing and profits. This paper investigates the effects of tax rates on firms’ profits and financing decisions by analyzing a panel of several hundred thousand European firms for the years 1985 to 2010. Results indicate that taxation has a negative effect on overall firm profits but not on returns on shareholder funds. This is consistent with the observed positive effect of corporate taxation rates on the gearing ratio, i.e. the higher corporate tax rates in a particular jurisdiction the lower the share of equity financing of firms residing in that jurisdiction. This may indicate that high-tax jurisdictions deter valuable investment by multinational enterprises because they provide incentives to locate value-driving business parts requiring more equity financing elsewhere.
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  • Stefan Lutz, 2012. "Effects of taxation on European multi-nationals’ financing and profits," Economics Discussion Paper Series 1214, Economics, The University of Manchester.
  • Handle: RePEc:man:sespap:1214
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    Cited by:

    1. Oehler, Andreas & Wendt, Stefan & Horn, Matthias, 2017. "Are investors really home-biased when investing at home?," Research in International Business and Finance, Elsevier, vol. 40(C), pages 52-60.

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    JEL classification:

    • G0 - Financial Economics - - General
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • F2 - International Economics - - International Factor Movements and International Business

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