I am grateful to the Deutsche Bundesbank for granting access to the MiDi database. I thank Chang Woon Nam, Fédéric Holm-Hadulla, Valeria Merlo, two anonymous referees as well as Beata Javorcik (the editor) for helpful comments and discussions. All errors, omissions, and conclusions remain the sole responsibility of the author.
The Impact of Thin-Capitalization Rules on External Debt Usage – A Propensity Score Matching Approach†
Article first published online: 19 JUL 2013
© John Wiley & Sons Ltd and the Department of Economics, University of Oxford 2013.
Oxford Bulletin of Economics and Statistics
How to Cite
Wamser, G. (2013), The Impact of Thin-Capitalization Rules on External Debt Usage – A Propensity Score Matching Approach. Oxford Bulletin of Economics and Statistics. doi: 10.1111/obes.12040
- Article first published online: 19 JUL 2013
Thin-capitalization rules (TCRs) aim at limiting the tax advantage of internal debt financing by restricting the tax deductibility of the corresponding interest expenses. This article examines how subsidiaries of multinational firms respond to a change in the German thin-capitalization legislation. The empirical analysis not only demonstrates that the TCR effectively restricts internal debt financing, it also suggests that firms are able to avoid taxation of interest by substituting external for internal debt. The empirical approach applies propensity score matching techniques and exploits the German tax reform 2001 to solve endogeneity problems.