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Interest barrier and capital structure response

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  • Alberternst, Stephan
  • Sureth-Sloane, Caren

Abstract

The Organisation for Economic Co-Operation and Development (OECD) recently proposed an interest barrier to fight tax base erosion and profit shifting (BEPS). We use the introduction of such an interest deductibility restriction in Germany as a quasi-experiment and find significant corporate capital structure responses. Using single entity financial statements and a detailed matching approach, we find evidence that companies that are affected by the interest barrier reduce their leverage by 4.7 percentage points more than non-affected companies. The effects are stronger among non-financially constrained firms. Our results imply that interest barrier effects on capital structure have so far been heavily underestimated.

Suggested Citation

  • Alberternst, Stephan & Sureth-Sloane, Caren, 2016. "Interest barrier and capital structure response," arqus Discussion Papers in Quantitative Tax Research 206, arqus - Arbeitskreis Quantitative Steuerlehre.
    • Handle: RePEc:zbw:arqudp:206
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    References listed on IDEAS

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    Cited by:

    1. Jarkko Harju & Ilpo Kauppinen & Olli Ropponen, 2017. "Firm Responses to an Interest Barrier: Empirical Evidence," EconPol Working Paper 3, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    2. Ropponen, Olli, 2021. "Interest Limitation Rules and Business Cycles: Empirical Evidence," ETLA Working Papers 90, The Research Institute of the Finnish Economy.

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    More about this item

    Keywords

    financing decisions; German tax reform; interest barrier; leverage;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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