Curbing Corporate Debt Bias

IMF Working Papers, January 30, 2017

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Curbing Corporate Debt Bias

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Bibliographic details

• Authors: Ruud A. de Mooij, Shafik Hebous
• Published: January 30, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781475573053.001

Overview

• Tax provisions favoring corporate debt over equity finance ("debt bias") are identified as a risk to financial stability.
• The paper examines whether and how thin-capitalization rules, which restrict interest deductibility beyond a certain amount, affect corporate debt ratios and mitigate financial stability risk.
• Authors: Ruud A. de Mooij, Shafik Hebous.
• Date: January 30, 2017.

Key findings

• 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).
  • Have no effect on broader indicators of firm financial distress.
• Rules applying to all debt (as opposed to only related-party debt):
  • Reduce the debt-asset ratio in an average company by 5 percentage points.
  • Reduce the probability for a firm to be in financial distress by 5 percent.
• Heterogeneity:
  • Debt ratios are more responsive to thin capitalization rules in industries characterized by a high share of tangible assets.

Methodological and thematic notes

• Focus: interaction between thin-capitalization rules and corporate capital structure (debt-asset ratio) and financial distress indicators.
• Policy instrument examined: thin-capitalization rules that restrict interest deductibility beyond a certain amount, with variation in scope (related-party only vs. all debt).

Policy implications / Recommendations (implied by findings)

• Broad-based thin-capitalization rules that apply to all debt appear effective in lowering corporate leverage and reducing firm financial distress.
• Narrow rules targeting only related-party borrowing are unlikely to address the broader debt bias problem or reduce financial stability risks tied to third-party borrowing.
• Consideration of industry structure (share of tangible assets) is important when assessing the potential impact of thin-capitalization rules.

Source: "Curbing Corporate Debt Bias", Ruud A. de Mooij and Shafik Hebous, January 30, 2017.

Content in this bundle

• Curbing Corporate Debt Bias: Do Limitations to Interest Deductibility Work?
  • Curbing Corporate Debt Bias: Do Limitations to Interest Deductibility Work? (Markdown version)
  • Curbing Corporate Debt Bias: Do Limitations to Interest Deductibility Work? (PDF)