International Debt Shifting: The Value Maximizing Mix of Internal and External Debt
51 Pages Posted: 2 Apr 2019
Date Written: March 29, 2019
We study the capital structure of multinationals and expand previous theory by incorporating international debt tax shield effects from both internal and external capital markets. We show that: (i) multinationals' firm value is maximized if both internal and external debt are used to save tax; (ii) the use of internal and external debt is independent of each other; (iii) multinationals have a tax advantage over domestic firms, which cannot shift debt across international borders. We test our model using a large panel of German multinationals and find that internal and external debt shifting are of about equal importance.
Keywords: Corporate taxation, multinationals, capital structure, international debt-shifting, tax avoidance
JEL Classification: H25, G32, F23
Suggested Citation: Suggested Citation