International Debt Shifting: The Value-Maximizing Mix of Internal and External Debt

Jarle Møen, Dirk Schindler, Guttorm Schjelderup and Julia Tropina Bakke

International Journal of the Economics of Business, 2019, vol. 26, issue 3, 431-465

Abstract: 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; and (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.

Date: 2019
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Working Paper: International Debt Shifting: The Value Maximizing Mix of Internal and External Debt (2019)
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DOI: 10.1080/13571516.2019.1599189

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