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Journal of Business Economics

Erschienen in:

01.12.2011 | Forschung

Corporation taxes and the debt policy of multinational firms

Evidence for German multinationals

verfasst von: Prof. Dr. Thiess Buettner, Prof. Dr. Michael Overesch, Prof. Dr. Ulrich Schreiber, Dr. Georg Wamser

Erschienen in: Journal of Business Economics | Ausgabe 12/2011

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Abstract

This paper analyzes the impact of corporate taxes on the capital structure of foreign subsidiaries of multinational firms. The empirical investigation employs a large micro-level panel dataset of German multinationals covering 31 countries over a 10-year period. A special feature of this dataset is that it allows us to distinguish between internal and external debt financing. Our results confirm a positive effect of local tax rates on both types of debt. Moreover, while adverse local credit market conditions are found to reduce external borrowing, internal debt is increasing, supporting the view that the two channels of debt finance are substitutes. Our findings suggest that internal credit markets give rise to significant advantages and enhance multinationals’ opportunities to use debt as a tax shield.

Vorheriger Artikel Die Geld-zurück-Garantie – Mehr als nur ein Qualitätsindikator?

Nächster Artikel Regionales Clustering im Ausschüttungsverhalten von Sparkassen

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Journal of Business Economics

From January 2013, the Zeitschrift für Betriebswirtschaft (ZfB) is published in English under the title Journal of Business Economics (JBE). The Journal of Business Economics (JBE) aims at encouraging theoretical and applied research in the field of business economics and business administration, promoting the exchange of ideas between science and practice.

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Under a German double tax treaty distributed profits of foreign subsidiaries are tax exempt at the corporate parent’s level. Since 2001, exemption is granted by German tax law, subject to five percent of the dividends being taxed.

In addition to the statutory tax rate we take into account up to nine control variables for the determinants of the capital structure, while the recent study by Buettner et al. (2009), for example, includes only three additional controls.

The proposition of a more pronounced tax effect under the exemption system does also hold if interest income is subject to a high tax rate as, for example, in Germany. The variation in the host country tax rate affects the incentive to use internal debt financing also if internal credit is associated with high total taxes due to the taxation of interest income.

Capital is defined as the sum of nominal capital, capital reserves, profit reserves, and total debt.

We control for the variation in German tax rates over time by means of time fixed effects because all parent companies of our sample are located in Germany. Moreover, we control, to some extent, for the unobservable heterogeneity in the financial decisions of the parent companies by means of fixed effects for each company. This also takes account of more complex company structures, such as the existence of conduit companies.

We transform the marginal tax effects into semi-elasticities of the debt ratio by dividing the marginal tax effect by the sample mean of the debt ratio.

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Titel: Corporation taxes and the debt policy of multinational firms
Evidence for German multinationals
verfasst von: Prof. Dr. Thiess Buettner
Prof. Dr. Michael Overesch
Prof. Dr. Ulrich Schreiber
Dr. Georg Wamser
Publikationsdatum: 01.12.2011
Verlag: SP Gabler Verlag
Erschienen in: Journal of Business Economics / Ausgabe 12/2011
Print ISSN: 0044-2372
Elektronische ISSN: 1861-8928
DOI: https://doi.org/10.1007/s11573-011-0520-5

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