Tax Status and Tax Response Heterogeneity of Multinationals' Debt Finance

This paper analyzes how corporate taxation affects the capital structure of subsidiaries of multinational companies. The emphasis is on firm characteristics that proxy for the tax status of a subsidiary, which is crucial for the tax responsiveness of firms. Based on a comprehensive panel of German multinationals, we find that the tax sensitivity of the capital structure is significantly affected by several firm characteristics. Our results imply that well-known non-debt tax shields such as depreciation allowances and loss carryforwards reduce the tax sensitivity of the debt-to-capital ratio. We also find that a higher probability of experiencing losses reduces the tax-rate sensitivity of debt financing.