ULRICH GLOGOWSKY
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Leverage, Corporate Taxes and Debt Shifting of Multinationals: The Impact of Firm-specific Risk
Firms  have  the  incentive  to  enhance  debt  financing  with  higher corporate  tax rates due to the increased value of interest deductions from the tax base. However, external debt is relatively costly for corporations with a high firm-specific risk. Moreover, for multinationals, the shifting of internal debt opens up additional tax saving opportunities. Using a large database of European multinationals for the years 1998-2006, first, we provide evidence that the debt-to-assets ratio is positively  affected  by  the  statutory  corporate  tax  rate.  Second,  we  show  that multinational subsidiaries use debt shifting with the parent as well as external debt to get advantage of the depreciation tax shield. Third, we provide evidence that subsidiaries with a high firm-specific risk are more involved in debt shifting than low-risk subsidiaries. Vice-versa, low-risk affiliates use external debt more intensively.  We  address  endogeneity  concerns  on  our  firm-specific  risk  proxies with  a  sectoral  analysis  comparing  high-risk  with  low-risk  industries  based  on exogenous information and and a similar, even more extreme pattern.
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