Debt and taxes: the role of corporate group structure

Peter Brok

Review of Finance, 2024, vol. 28, issue 6, 2051-2082

Abstract: I show that the corporate group structure generates tax benefits that create incentives for higher leverage. The tax benefits arise when losses on distressed subsidiaries are tax deductible for a parent firm. Higher tax rates then imply that more of these losses are borne by the government instead of the parent firm, reducing the expected costs of bankruptcy and thereby incentivizing the subsidiaries to take on higher leverage. Using data from a large sample of European multinationals, I show that this tax benefit exists on top of the trade-off theory and debt-shifting effects, and is stronger when deductions of subsidiary losses are more generous.

Keywords: capital structure; corporate structure; corporate tax; debt shifting (search for similar items in EconPapers)
JEL-codes: G32 H25 H32 M40 (search for similar items in EconPapers)
Date: 2024
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