Existing theories of a firm’s optimal capital structure seem to fail in explaining why many healthy and profitable firms rely heavily on equity financing, even though benefits associated with debt (like tax shields) appear to be high and the bankruptcy risk low. This holds in particular for...

This paper examines the impact of thin capitalization rules that limit the tax deductibility of interest on the capital structure of the foreign affiliates of US multinationals. We construct a new data set on thin capitalization rules in 54 countries for the period 1982-2004. Using confidential...

Multinational companies can exploit the tax advantage of debt more aggressively than national companies by shifting debt from affiliates in low tax countries to affiliates in high tax countries. Previous papers have either omitted internal debt or external debt from the analysis. We are the...

This article studies the relationship between debt policies of multinational companies (MNCs) and governments’ tax strategies. In the first part, it is shown that the ability to shift income from high- to low-tax countries affects MNCs’ financial choices. In the second part we show how...

This article studies the characteristics of a S-based tax system under default risk. In particular we show that its neutrality properties depend on whether debt is protected or unprotected. In the former case, this system is neutral. In the latter case, where default timing is optimally chosen...

Tax neutrality towards alternative financing instruments for corporate investment is a ubiquitous demand in the political debate. At the same time, the literature is surprisingly silent about the magnitude of possible efficiency costs of a departure from tax neutrality. Againstthis background,...

This article aims at analyzing the link between subsidiaries’ capital structure and taxation in Europe. First we introduce a trade-off model, which studies a MNCs’ financial strategy and shows how debt policy allows multinational groups to shift profits from low-tax to high-tax...

We offer a unified framework to analyze the determination of employment, employee effort, wages, profit-sharing and capital structure when firms face stochastic revenue shocks. We apply a generalized Nash bargaining solution, which extends the wage bargaining literature by incorporating...

The evidence shows that in most countries the present value of depreciation allowances is less than 100% of the cost of capital. In this article we use a real-option model with debt financing, and show that less favorable depreciation allowances are offset by tax benefits arising from debt...