The Effect of Taxes on Corporate Financing Decisions - Evidence from the German Interest Barrier

Alberternst, Stephan and Sureth-Sloane, Caren (2015) The Effect of Taxes on Corporate Financing Decisions - Evidence from the German Interest Barrier. WU International Taxation Research Paper Series, 2015-09. WU Vienna University of Economics and Business, Universität Wien, Vienna.


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The literature suggests that when taking tax effects into account, debt ought to be preferable to equity. Thus, with all else being equal, levered firms are expected to show higher firm values. However, there are no uniform predictions of the size of this tax benefit from interest deductibility nor on the effect of changes in interest deductibility. We believe that the German corporate tax reform in 2008, which introduced an interest barrier, can serve as a promising "quasiexperiment" to investigate the effects from a reform of interest deductibility. A study of this reform on the basis of German financial statement data is of general interest because, first, similar interest barriers have been introduced in several countries and proposed by the OECD to fight BEPS. Second, the major characteristics of the German tax system can be regarded as representative for most European and major Asian countries. Third, single entity financial statements for German companies allows us to capture tax and capital structure details that have not been available in most prior studies. With significance at the 5% level, we find evidence that the companies that are affected by the interest barrier reduce their leverage by 4.7 percentage points more than companies that are not affected by the interest barrier. We are the first to employ a detailed matching approach to the underlying rich dataset, which enables us to overcome several limitations of previous studies. Our results imply that capital structure reactions most likely have been underestimated in previous studies.

Item Type: Paper
Additional Information: Editors: Eva Eberhartinger, Michael Lang, Martin Zagler (Vienna University of Economics and Business), Erich Kirchler (University of Vienna) and Rupert Sausgruber (University of Innsbruck)
Keywords: Financing decisions / German tax reform / interest barrier / leverage / taxation / thin capitalization rules
Classification Codes: JEL F34, H21, H24
Depositing User: ePub Administrator
Date Deposited: 25 Feb 2016 08:53
Last Modified: 22 Oct 2019 00:41


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