Taxes and Leverage at Multinational Corporations

Abstract

Empirical research has struggled to document the variation in recent corporate capital structures as arising from variation in estimated corporate income tax rates. We argue that in previous studies, both the tax rates being applied to multinational corporations and the taxable income earned has been miss-measured, a result of firms operating in many foreign countries. Using a sample of multinational firms collected in the Bureau of Economic Analysis’ annual survey combined with each firm’s respective income and country specific tax rate, we revisit this tax-leverage puzzle. Empirically we find that firms do have higher leverage ratios and lower interest coverage ratios when they operate in countries with higher tax rates, as theory would suggest. Our results demonstrate that the primary benefit of leverage under the trade-off theory of capital structure continues to have empirical support.

Keywords: Capital Structure, Taxes

JEL Classification: G30