Empirical Evaluation of Interest Barrier Effects
40 Pages Posted: 18 Jul 2012 Last revised: 21 Jul 2015
Date Written: 2012
This paper empirically estimates the effects of a new thin-capitalization rule on the financing behavior of German corporations employing a fixed effects difference-in-difference approach. We compare treatment and control groups separated by a hypothetical application of the new rule in three years before its introduction. Our analysis does not provide empirical evidence for a pure interest barrier effect. This indicates that the few affected firms were either unable to reduce their leverage or used exceptions. The observable trend towards less debt might stem from a general preference for lower debt ratios after the crisis or from the tax rate cut, which was introduced simultaneously.
Keywords: Capital Structure, Corporate Taxation, Interest Barrier, Empirical Analysis, Firm-Level Data
JEL Classification: F23, H25, H32
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