## Curbing Corporate Debt Bias

_IMF Working Papers, January 30, 2017_

## Source details

**Canonical URL:** [Curbing Corporate Debt Bias](https://www.imf.org/en/publications/wp/issues/2017/01/30/curbing-corporate-debt-bias-44605)

## Other formats

- [Markdown version](/en/publications/wp/issues/2017/01/30/curbing-corporate-debt-bias-44605/index.md)
- [Structured JSON version](/en/publications/wp/issues/2017/01/30/curbing-corporate-debt-bias-44605/index.json)
- [Bundle manifest](/en/publications/wp/issues/2017/01/30/curbing-corporate-debt-bias-44605/bundle-manifest.json)

## 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)](/-/media/files/publications/wp/wp1722.pdf.md){rel="alternate" type="text/markdown"}
  - [Curbing Corporate Debt Bias: Do Limitations to Interest Deductibility Work? (PDF)](/-/media/files/publications/wp/wp1722.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2017/01/30/curbing-corporate-debt-bias-44605_