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The Capital Structure of Multinational Companies Under Tax Competition

  • Paolo Panteghini

This article studies the relationship between debt policies of multinational companies (MNCs) and governments' tax strategies. In the first part, it is shown that the ability to shift income from high to low-tax countries affects MNCs' financial choices. In the second part we show how MNCs' financial decisions can affect the tax strategies of two governments competing to attract income. Furthermore we show that, for reasonable levels of risk aversion, the use of an equally weighted portfolio is surprisingly consistent with an expected utility maximizing behavior.

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Paper provided by University of Brescia, Department of Economics in its series Working Papers with number ubs0606.

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Date of creation: 2006
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Handle: RePEc:ubs:wpaper:ubs0606
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  1. Rosanne Altshuler & Harry Grubert, 2001. "Repatriation Taxes, Repatriation Strategies and Multinational Financial Policy," NBER Working Papers 8144, National Bureau of Economic Research, Inc.
  2. Goldstein, Robert & Ju, Nengjiu & Leland, Hayne, 2001. "An EBIT-Based Model of Dynamic Capital Structure," The Journal of Business, University of Chicago Press, vol. 74(4), pages 483-512, October.
  3. Desai, Mihir A. & Fritz Foley, C. & Hines Jr., James R., 2008. "Capital structure with risky foreign investment," Journal of Financial Economics, Elsevier, vol. 88(3), pages 534-553, June.
  4. Haufler, A. & Schjelderup, G., 1999. "Corporate Tax Systems and Cross Country Profit Shifting," Papers 1/99, Norwegian School of Economics and Business Administration-.
  5. Paolo Panteghini & Guttorm Schjelderup, 2006. "To Invest or not to Invest: A real options approach to FDIs and tax competition," International Tax and Public Finance, Springer, vol. 13(6), pages 643-660, November.
  6. Michael Keen, 1993. "The welfare economics of tax co-ordination in the European Community : a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 14(2), pages 15-36, February.
  7. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-50, July.
  8. Devereux, Michael P & Lockwood, Ben & Redoano, Michela, 2002. "Do Countries Compete Over Corporate Tax Rates?," The Warwick Economics Research Paper Series (TWERPS) 642, University of Warwick, Department of Economics.
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  11. Paolo Panteghini, 2005. "S-Based Taxation under Default Risk," CESifo Working Paper Series 1496, CESifo Group Munich.
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  13. Mihir A. Desai & C. Fritz Foley, 2004. "The Comovement of Returns and Investment Within the Multinational Firm," NBER Working Papers 10785, National Bureau of Economic Research, Inc.
  14. 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.
  15. Roger H. Gordon & Hal R. Varian, 1986. "Taxation of Asset Income in the Presence of a World Securites Market," NBER Working Papers 1994, National Bureau of Economic Research, Inc.
  16. Gordon, Roger H. & Hines, James Jr, 2002. "International taxation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 28, pages 1935-1995 Elsevier.
  17. Huizinga, Harry & Laeven, Luc & Nicodème, Gaëtan, 2006. "Capital Structure and International Debt Shifting," CEPR Discussion Papers 5882, C.E.P.R. Discussion Papers.
  18. Jack Mintz & Alfons Weichenrieder, 2005. "Taxation and the Financial Structure of German Outbound FDI," CESifo Working Paper Series 1612, CESifo Group Munich.
  19. Paolo M. Panteghini, 2004. "Neutrality Properties of Firm Taxation under Default Risk," Economics Bulletin, AccessEcon, vol. 8(4), pages 1-7.
  20. Cherian, Joseph A. & Perotti, Enrico, 2001. "Option pricing and foreign investment under political risk," Journal of International Economics, Elsevier, vol. 55(2), pages 359-377, December.
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  22. Mills, Lillian F. & Newberry, Kaye J., 2004. "Do Foreign Multinationals’ Tax Incentives Influence Their U.S. Income Reporting and Debt Policy?," National Tax Journal, National Tax Association, vol. 57(1), pages 89-107, March.
  23. Clemens Fuest & Thomas Hemmelgarn, 2003. "Corporate Tax Policy, Foreign Firm Ownership and Thin Capitalization," CESifo Working Paper Series 1096, CESifo Group Munich.
  24. Kangoh Lee, 2004. "Taxation of Mobile Factors as Insurance under Uncertainty," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(2), pages 253-271, 06.
  25. Mihir A. Desai & C. Fritz Foley & James R. Hines, 2004. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," Journal of Finance, American Finance Association, vol. 59(6), pages 2451-2487, December.
  26. Mihir A. Desai, 2005. "The Degradation of Reported Corporate Profits," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 171-192, Fall.
  27. Sorensen, Bent E. & Wu, Yi-Tsung & Yosha, Oved & Zhu, Yu, 2007. "Home bias and international risk sharing: Twin puzzles separated at birth," Journal of International Money and Finance, Elsevier, vol. 26(4), pages 587-605, June.
  28. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  29. Leland, Hayne E, 1994. " Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-52, September.
  30. Wilson, John Douglas & Wildasin, David E., 2004. "Capital tax competition: bane or boon," Journal of Public Economics, Elsevier, vol. 88(6), pages 1065-1091, June.
  31. Branch, Ben, 2002. "The costs of bankruptcy: A review," International Review of Financial Analysis, Elsevier, vol. 11(1), pages 39-57.
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