Taxes and Leverage at Multinational Corporations


Faulkender M, Smith J. Taxes and Leverage at Multinational Corporations. Working Paper [Internet]. 2015.
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Empirical research has struggled to explain the lack of variation in recent corporate capital structures arising from variation in different tax environments. We argue that in previous studies, both the tax rates being applied to multinational corporations and the income earned has been miss-measured, resulting from firms operating in many foreign countries. Using a sample of multinational firms collected in the Bureau of Economic Analysis’ annual survey combined with each firm’s respective income and country specific tax rate, we revisit this puzzle. Empirically we find that firms do have higher leverage ratios and lower interest coverage ratios when they operate in countries with higher tax rates, as theory would suggest. These results explain why recent capital structure observations for multinationals have not showed the statistical relationship to existing measures of tax rates, such as, those by Graham (1996a) and Blouin, Core, and Guay (2010). Our results demonstrate that the primary benefit of leverage under the tradeoff theory of capital structure continues to have empirical support.

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