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Capital structure and international debt shifting

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Author Info
Huizinga, Harry
Laeven, Luc
Nicodeme, Gaetan

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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. Our empirical results show that a foreign subsidiary's capital structure reflects local corporate tax rates as well as tax rate differences vis-à-vis the parent firm and other foreign subsidiaries, although the overall economic effect of taxes on leverage appears to be small. Ignoring the international debt shifting arising from differences in national tax rates would understate the impact of national taxes on debt policies by about 25%.

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Publisher Info
Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 88 (2008)
Issue (Month): 1 (April)
Pages: 80-118
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Handle: RePEc:eee:jfinec:v:88:y:2008:i:1:p:80-118

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Web page: http://www.elsevier.com/locate/inca/505576

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  1. European Public Finance (ECON-O-403)
References listed on IDEAS
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  2. Hodder, James E & Senbet, Lemma W, 1990. " International Capital Structure Equilibrium," Journal of Finance, American Finance Association, vol. 45(5), pages 1495-1516, December. [Downloadable!] (restricted)
  3. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December. [Downloadable!] (restricted)
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  4. Assaf Razin & Joel Slemrod, 1990. "Taxation in the Global Economy," NBER Books, National Bureau of Economic Research, Inc, number razi90-1.
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  6. Laurence Booth, 2001. "Capital Structures in Developing Countries," Journal of Finance, American Finance Association, vol. 56(1), pages 87-130, 02. [Downloadable!] (restricted)
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  7. Kenneth A. Froot & James R. Hines, Jr., 1995. "Interest Allocation Rules, Financing Patterns, and the Operations of U.S. Multinationals," NBER Working Papers 4924, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. James R. Hines Jr., 1994. "Credit and Deferral as International Investment Incentives," NBER Working Papers 4191, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Grubert, Harry, 1998. "Taxes and the division of foreign operating income among royalties, interest, dividends and retained earnings," Journal of Public Economics, Elsevier, vol. 68(2), pages 269-290, May. [Downloadable!] (restricted)
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  11. James R. Hines, Jr. & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," NBER Working Papers 3477, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. James R. Hines, Jr. & R. Glenn Hubbard, 1990. "Coming Home to America: Dividend Repatriations by U.S. Multinationals," NBER Working Papers 2931, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Simeon Djankov & Caralee McLiesh & Andrei Shleifer, 2005. "Private Credit in 129 Countries," NBER Working Papers 11078, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Frances Ruane & Padraig Moore, 2005. "Taxation and the Financial Structure of Foreign Direct Investment," The Institute for International Integration Studies Discussion Paper Series iiisdp88, IIIS. [Downloadable!]
  15. Gordon, Roger H. & Lee, Young, 2001. "Do taxes affect corporate debt policy? Evidence from U.S. corporate tax return data," Journal of Public Economics, Elsevier, vol. 82(2), pages 195-224, November. [Downloadable!] (restricted)
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  16. Hovakimian, Armen & Hovakimian, Gayane & Tehranian, Hassan, 2004. "Determinants of target capital structure: The case of dual debt and equity issues," Journal of Financial Economics, Elsevier, vol. 71(3), pages 517-540, March. [Downloadable!] (restricted)
  17. Eugene F. Fama & Kenneth R. French, 1998. "Taxes, Financing Decisions, and Firm Value," Journal of Finance, American Finance Association, vol. 53(3), pages 819-843, 06. [Downloadable!] (restricted)
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  18. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May. [Downloadable!] (restricted)
  19. 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. [Downloadable!] (restricted)
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