Debt and Taxes: The Role of Corporate Group Structure

Peter Brok*

*Corresponding author for this work

Research output: Contribution to journalJournal articleResearchpeer-review

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.
Original languageEnglish
JournalReview of Finance
Volume28
Issue number6
Pages (from-to)2051-2082
Number of pages32
ISSN1572-3097
DOIs
Publication statusPublished - Nov 2024

Bibliographical note

Published online: 22 August 2024.

Keywords

  • Capital structure
  • Corporate structure
  • Corporate tax
  • Debt shifting

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