Curbing Corporate Debt Bias

21 Pages Posted: 23 Mar 2017

See all articles by Ruud A. De Mooij

Ruud A. De Mooij

International Monetary Fund (IMF); CESifo (Center for Economic Studies and Ifo Institute); Oxford University Centre for Business Taxation

Shafik Hebous

International Monetary Fund

Date Written: January 2017


Tax provisions favoring corporate debt over equity finance ('debt bias') are widely recognized as a risk to financial stability. This paper explores whether and how thin-capitalization rules, which restrict interest deductibility beyond a certain amount, affect corporate debt ratios and mitigate financial stability risk. We find that rules targeted at related party borrowing (the majority of today's rules) have no significant impact on debt bias-which relates to third-party borrowing. Also, these rules have no effect on broader indicators of firm financial distress. Rules applying to all debt, in contrast, turn out to be effective: the presence of such a rule reduces the debt-asset ratio in an average company by 5 percentage points; and they reduce the probability for a firm to be in financial distress by 5 percent. Debt ratios are found to be more responsive to thin capitalization rules in industries characterized by a high share of tangible assets.

Keywords: Corporate debt, Debt service ratios, Financial risk, Corporate taxes, Thin capitalization, Risk management, Econometric models, Corporate tax, capital structure, debt bias, thin capitalization rule

JEL Classification: G32, H25

Suggested Citation

De Mooij, Ruud A. and Hebous, Shafik, Curbing Corporate Debt Bias (January 2017). IMF Working Paper No. 17/22, Available at SSRN:

Ruud A. De Mooij (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679

Oxford University Centre for Business Taxation ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom


Shafik Hebous

International Monetary Fund ( email )

Washington, DC
United States

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