Thin Capitalization Rules and Multinational Firm Capital Structure
IMF Working Papers, January 24, 2014
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Bibliographic details
- Authors: Jennifer Blouin, Harry Huizinga, Luc Laeven, Gaetan Nicodeme
- Published: January 24, 2014
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484384442.001
Research question and data
- Examines the impact of thin capitalization rules that limit the tax deductibility of interest on the capital structure of the foreign affiliates of US multinationals.
- New data set constructed on thin capitalization rules in 54 countries for the period 1982-2004.
- Uses confidential data on the internal and total leverage of foreign affiliates of US multinationals.
Key empirical findings
- Restrictions on an affiliate’s debt-to-assets ratio reduce this ratio on average by 1.9%.
- Restrictions on an affiliate’s borrowing-from-the-parent-to-equity ratio reduce this ratio on average by 6.3%.
- Restrictions on borrowing from the parent reduce the affiliate’s debt-to-assets ratio by 0.8%, indicating rules targeting internal leverage have an indirect effect on overall affiliate indebtedness.
- The impact of capitalization rules on affiliate leverage is higher if their application is automatic rather than discretionary.
- Thin capitalization regimes reduce the firm’s aggregate interest expense but lower firm valuation.
Mechanisms and interpretation
- Direct constraints on debt-to-assets ratios and parent-to-equity internal leverage limits alter affiliate financing choices and observable leverage measures.
- Internal (related-party) borrowing restrictions have both direct effects on internal leverage measures and indirect spillovers to total affiliate leverage.
- Automatic enforcement increases the effectiveness of rules relative to discretionary enforcement.
Aggregate firm effects and valuation
- Thin capitalization regimes generate firm-level aggregate effects beyond affiliate-level leverage:
- Reduce aggregate interest expense.
- Lower firm valuation (market valuation).
Subject areas and keywords (as provided)
- Subjects: Domestic debt, Economic sectors, External debt, Financial institutions, Public debt, Stocks, Taxes, Thin capitalization rules, Transnational corporations
- Keywords: affiliate debt, Capital structure, Domestic debt, Global, interest deductibility, interest expense, leverage ratio, leverage restriction, Multinational firm, rate of inflation, Stocks, Taxation, Thin capitalization rule, Thin capitalization rules, Transnational corporations, WP
Thin Capitalization Rules and Multinational Firm Capital Structure — Jennifer Blouin, Harry Huizinga, Luc Laeven, Gaetan Nicodeme; January 24, 2014.