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

Author

Listed:
  • Thiess Buettner

    (Ifo Institute for Economic Research, Poschingerstr. 5, D-81679 Munich, Mannheim, Germany)

  • Michael Overesch

    (ZEW, L 7,1 D-68161 Mannheim, Postfach 103443 D-68034)

  • Ulrich Schreiber

    (Mannheim University and ZEW, Mannheim Business School, L 5, 6, 68131 Mannheim, Deutschland)

  • Georg Wamser

    (Ifo Institute for Economic Research, Poschingerstr. 5, D-81679 Munich, Mannheim, Germany)

Abstract

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.

Suggested Citation

  • Thiess Buettner & Michael Overesch & Ulrich Schreiber & Georg Wamser, 2006. "The Impact of Thin-Capitalization Rules on Multinationals' Financing and Investment Decisions," Working Papers 2006-06, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
    • Handle: RePEc:ifr:wpaper:2006-06
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Corporate Income Tax; Multinationals; Leverage; Thin-Capitalization Rules; Firm-Level Data;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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