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Empirical evaluation of interest barrier effects
Dreßler, Daniel
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Scheuering, Uwe
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URL:
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https://ub-madoc.bib.uni-mannheim.de/32426
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URN:
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urn:nbn:de:bsz:180-madoc-324267
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Document Type:
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Working paper
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Year of publication:
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2012
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The title of a journal, publication series:
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ZEW Discussion Papers
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Volume:
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12-046
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Place of publication:
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Mannheim
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Publication language:
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English
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Institution:
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Sonstige Einrichtungen > ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung
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MADOC publication series:
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Veröffentlichungen des ZEW (Leibniz-Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
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Subject:
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330 Economics
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Classification:
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JEL:
F23 , H25 , H32,
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Keywords (English):
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Capital structure , corporate taxation , interest barrier , empirical analysis , firm-level data
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Abstract:
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We analyze the impact of changes in thin capitalization rules on corporations' capital
structure. Thin capitalization rules prevent firms from deducting excessive interest expenses
from their tax base. As of 2008, Germany has severely changed its thin capitalization
rule by targeting interest payments instead of debt to equity ratios. The new rule
has primarily been introduced to prohibit tax avoidance by multinationals. For reasons
of non-discrimination, the rule is, however, equally attributable on the national level and
it is applicable to both internal and external financing. The theoretical and analytical
literature has brought forward many arguments stating that the new interest barrier is
harmful to firms, distorting their financing decisions. Four years after its introduction, the
time has come to empirically evaluate the interest barrier. The DAFNE database serves
as our source of reference. We differentiate by firm characteristics, by industry and by
kind of debt. We find that the interest barrier drove firms to lower their debt to assets ratios
and their net interest payments. Opposing its original intention, it was, however, also
the national firms which adjusted their capital structure, and it was external rather than
internal debt which was reduced. Thus, the interest barrier does indeed affect fnancing
decisions, but predominantly not in the intended way and not of the intended firms. In
sensitivity analyses we examine highly leveraged and low profitable firms, which are likely
to be subject to the interest barrier. The results suggest a debt-reducing interest barrier
effect for these companies as well.
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