Do thin-capitalization rules affect capital structure decisons? : evidence from Norwegian multinationals.

Abstract

This thesis studies the effects of thin-capitalization rules on the level and the tax rate sensitivity of internal and total debt in foreign affiliates of Norwegian multinationals. In response to multinationals’ enhanced opportunities to explore the tax advantages of debt, several countries have implemented such rules to protect their corporate tax base. For the empirical analysis, we construct a main sample of micro-level panel data on foreign affiliates of Norwegian multinationals in European and OECD countries, years 1996 – 2004, as well as an extended sample where 25 countries are added and the period extended to 1994 – 2006. The data set provides information on total and parent debt, where the latter serves to identify the effects on internal debt. The full samples provide weak evidence of thin-capitalization rules reducing the tax rate sensitivity of parent and total debt, and no evidence supporting a direct level effect. Two subsamples provide stronger evidence. In a subsample including only the countries that implemented a rule during the sample period, a thin-capitalization rule with a safe haven ratio of 4:1 is estimated to reduce the parent debt-to-assets ratio by 2.8 – 4.7 percentage points, and reduce the tax rate sensitivity of a 10 percentage points increase in the tax rate by 25% – 40%. A subsample including only firms with the highest parent debt ratios provides robust evidence of the same qualitative effects. Neither of the subsamples provides strong evidence for the expected effects on total debt. Identification of the effects of thin-capitalization rules has proven harder on the Norwegian data, compared to existing studies on German and US multinationals. To the extent this thesis provides evidence, it supports that thin-capitalization rules reduce the use of internal debt in affiliates of multinationals, but it only shows limited evidence of reduced total debt ratios.