Faculty of Economics and Business Administration Publications Database

Corporation Taxes and the Debt Policy of Multinational Firms - Evidence for German Multinationals

Büttner, Thiess
Overesch, Michael
Schreiber, Ulrich
Wamser, Georg
Volume: 81
Number: 12
Pages: 1325 - 1339
ISSN-Print: 0044-2372
ISSN-Online: 1861-8928
Link External Source: Online Version
Year: 2011
Keywords: Multinational corporation; Capital structure; Corporate income taxation; Internal debt; External debt; Firm-level data

This paper analyzes the impact of corporate taxes on the capital structure of foreign subsidiaries of multinational firms. The empirical investigation employs a large micro-level panel dataset of German multinationals covering 31 countries over a 10-year period. A special feature of this dataset is that it allows us to distinguish between internal and external debt financing. Our results confirm a positive effect of local tax rates on both types of debt. Moreover, while adverse local credit market conditions are found to reduce external borrowing, internal debt is increasing, supporting the view that the two channels of debt finance are substitutes. Our findings suggest that internal credit markets give rise to significant advantages and enhance multinationals’ opportunities to use debt as a tax shield.