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The tax-efficient use of debt in multinational corporations |
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| Institution: | 1. University of Notre Dame, United States;2. Norwegian School of Economics, Norway;1. Henry B. Tippie College of Business, Department of Finance, University of Iowa, 108 Pappajohn Business Bldg., Iowa City, IA 52242-1994, United States of America;2. Peter T. Paul College of Business and Economics, Department of Accounting and Finance, University of New Hampshire, 10 Garrison Avenue, Durham, NH 03824-2325, United States of America;1. Susquehanna University, United States of America;2. Wright State University, United States of America;3. Carlos Alvarez College of Business, University of Texas at San Antonio, United States of America;1. Wells Fargo Asset Management, United States of America;2. Saint Louis University, United States of America;3. University of Nevada, Reno, United States of America |
| Abstract: | Affiliates of multinationals borrow a considerable amount from their parent company, even when the parent is located in a high-tax country. This is at odds with standard theories of a tax-efficient capital structure. We set up a model that analyzes the functioning of the internal capital market and investigates the trade-off between tax savings and capital market frictions within the group. We test the model on data of the universe of German multinationals. The empirical analysis largely supports our model in that: (i) smaller multinationals often rely on parental debt financing; (ii) larger multinationals are more likely to use internal banks; (iii) parental debt and external debt are substitutes and the mix depends on the relative cost of raising capital through the parent and the affiliates; (iv) local and within-group tax incentives play an important role in determining all three types of debt. |
| Keywords: | Corporate taxation Multinationals Capital structure International debt shifting Parental debt |
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