Thin Capitalization Rules & Multinational Firm Capital Structure

Wharton Author: Jennifer Blouin [with Harry Huizinga, Tilburg Univ.; Luc Laeven, IMF; Gaëtan Nicodème]

This paper examines how thin capitalization regimes, that limit the deductibility of interest, affect the leverage of the affiliates of US multinationals. For this purpose, we construct a new data set on thin capitalization rules in 51 countries for the period 1980-2007 that provides detailed information on criteria and remedies. The presence of a thin capitalization regime is estimated to reduce affiliate leverage by 2.6 percent. At the same time, thin capitalization regimes reduce the sensitivity of total leverage to the tax rate by about two thirds.