IMF Working Papers

Curbing Corporate Debt Bias

By Ruud A. de Mooij, Shafik Hebous

January 30, 2017

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Ruud A. de Mooij, and Shafik Hebous. Curbing Corporate Debt Bias, (USA: International Monetary Fund, 2017) accessed November 8, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Tax provisions favoring corporate debt over equity finance (“debt bias”) are widely recognized as a risk to financial stability. This paper explores whether and how thin-capitalization rules, which restrict interest deductibility beyond a certain amount, affect corporate debt ratios and mitigate financial stability risk. We find that rules targeted at related party borrowing (the majority of today’s rules) have no significant impact on debt bias—which relates to third-party borrowing. Also, these rules have no effect on broader indicators of firm financial distress. Rules applying to all debt, in contrast, turn out to be effective: the presence of such a rule reduces the debt-asset ratio in an average company by 5 percentage points; and they reduce the probability for a firm to be in financial distress by 5 percent. Debt ratios are found to be more responsive to thin capitalization rules in industries characterized by a high share of tangible assets.

Subject: Corporate income tax, Debt bias, Economic and financial statistics, External debt, Financial statistics, Tax policy, Taxes, Thin capitalization rules

Keywords: Capital structure, Corporate income tax, Corporate tax, Debt bias, Debt-asset ratio, Dependent variable, EBITDFA percentage, Financial statistics, Global, Interest deductibility, So-called thin capitalization rules, TCR rule, TCR type, TCR variable, Tcrs in industry, Thin capitalization rule, Thin capitalization rules, Uniform tcrs, WP

Publication Details

  • Pages:

    20

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2017/022

  • Stock No:

    WPIEA2017022

  • ISBN:

    9781475573053

  • ISSN:

    1018-5941

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