The impact of thin-capitalizationrules on multinationals’financing and investment decisions

This paper analyzes the effectiveness of thin-capitalization rules in preventing debt financeby intercompany loans and explores their consequences for corporate decisions. A theoreticaldiscussion emphasizes that limitations of the deduction of interest owed to foreign afiliateswould not only affect multinationals' capital structure choice but also investment. An em-pirical investigation exploits a large firm-level panel dataset of multinationals in order toanalyze the impact of thin-capitalization rules on capital structure choice and investment inthe OECD and some further European countries in the time period between 1996 and 2004.The results indicate that thin-capitalization rules are effective in curbing tax planning viaintercompany loans. However, investment is found to be adversely affected.[...]