Do multinational firms invest more? On the impact of internal debt financing on capital accumulation

This study provides evidence on the causal impact of debt shifting activities of multinational companies (MNC) on their capital accumulation. The identification strategy exploits the corporate tax rate cut of 10%-points in Germany 2008 as a quasi-natural experiment. This reform reduced substantially the incentive of multinational firms to engage in debt shifting. Using a difference-in-differences matching strategy (DiD), the results suggest firstly that MNC decrease their fraction of internal borrowing and thus reduced or even stopped shifting profits abroad. Secondly they decreased their capital stock compared to purely domestic firms. Combined, the results suggest that if MNC shift profits abroad, their capital accumulation is less depressed by the national tax rate and thus benefits less from a tax rate reduction. The DiD results are confirmed by a structural approach, which focus on the tax incentive to shift profits to the headquarter for the identification. The findings are particularly strong for firms with a low ratio of profits before interest to their capital stock which suggests that only debt shifting but not transfer pricing fosters capital accumulation. Moreover, it is shown that more generous depreciation allowances decrease the difference in capital accumulation between domestic and multinational firms.