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The Impact of Thin-Capitalization Rules on Multinationals? Financing and Investment Decisions

  • Schreiber, Ulrich
  • Overesch, Michael
  • Büttner, Thiess
  • Wamser, Georg

This paper analyzes the role of Thin-Capitalization rules for capital structure choice and investment decisions of multinationals. A theoretical analysis shows that the imposition of such rules tends to affect not only the leverage and the level of investment but also their tax-sensitivity. An empirical investigation of leverage and investment reported for affiliates of German multinationals in 24 countries in the period between 1996 and 2004 offers some support for the theoretical predictions. While Thin-Capitalization rules are found to be effective in restricting debt finance, investment is found to be more sensitive to taxes if debt finance is restricted.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 06-68.

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Date of creation: 2006
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Handle: RePEc:zbw:zewdip:5462
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  1. Eckhard Janeba & Michael Smart, 2001. "Is Targeted Tax Competition Less Harmful than its Remedies?," CESifo Working Paper Series 590, CESifo Group Munich.
  2. Jeffrey MacKie-Mason, 1988. "Do Taxes Affect Corporate Financing Decisions?," NBER Working Papers 2632, National Bureau of Economic Research, Inc.
  3. Harry Huizinga & Luc Laeven & Gaetan Nicodeme, 2006. "Capital structure and international debt shifting," European Economy - Economic Papers 263, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  4. Paolo Panteghini, 2009. "The capital structure of multinational companies under tax competition," International Tax and Public Finance, Springer, vol. 16(1), pages 59-81, February.
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  8. Thiess Buettner & Michael Overesch & Ulrich Schreiber & Georg Wamser, 2006. "Taxation and Capital Structure Choice – Evidence from a Panel of German Multinationals," CESifo Working Paper Series 1841, CESifo Group Munich.
  9. Janeba, Eckhard & Smart, Michael, 2003. "Is Targeted Tax Competition Less Harmful Than Its Remedies?," International Tax and Public Finance, Springer, vol. 10(3), pages 259-80, May.
  10. Buettner, Thiess & Overesch, Michael & Schreiber, Ulrich & Wamser, Georg, 2009. "Taxation and capital structure choice--Evidence from a panel of German multinationals," Economics Letters, Elsevier, vol. 105(3), pages 309-311, December.
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  12. Paolo Panteghini, 2006. "The Capital Structure of Multinational Companies under Tax Competition," CESifo Working Paper Series 1721, CESifo Group Munich.
  13. Xavier WAUTHY & Susana PERALTA & Tanguy VAN YPERSELE, . "Should Countries Control International Profit Shifting?," EcoMod2004 330600158, EcoMod.
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  16. Bucovetsky, Sam & Haufler, Andreas, 2008. "Tax competition when firms choose their organizational form: Should tax loopholes for multinationals be closed?," Munich Reprints in Economics 19975, University of Munich, Department of Economics.
  17. Jack Mintz & Alfons Weichenrieder, 2005. "Taxation and the Financial Structure of German Outbound FDI," CESifo Working Paper Series 1612, CESifo Group Munich.
  18. Gravelle, Jane G., 2004. "The Corporate Tax: Where Has It Been and Where Is It Going?," National Tax Journal, National Tax Association, vol. 57(4), pages 903-23, December.
  19. Sam Bucovetsky & Andreas Haufler, 2005. "Tax Competition when Firms Choose their Organizational Form: Should Tax Loopholes for Multinationals be Closed?," CESifo Working Paper Series 1625, CESifo Group Munich.
  20. Mihir A. Desai, 2005. "The Degradation of Reported Corporate Profits," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 171-192, Fall.
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