| By: |
Stefan Lutz (University of Manchester, UK; Universidad Complutense de Madrid, Spain; ICER, Torino, Italy; I.R.E.F., Luxembourg) |
| Abstract: |
Important determinants of multinational firms’ choice of location include,
besides resource cost and infrastructure, the taxation regime through its
effects on international pricing and profits. This paper investigates the
effects of tax rates on firms’ profits and financing decisions by analyzing a
panel of several hundred thousand European firms for the years 1985 to 2010.
Results indicate that taxation has a negative effect on overall firm profits
but not on returns on shareholder funds. This is consistent with the observed
positive effect of corporate taxation rates on the gearing ratio, i.e. the
higher corporate tax rates in a particular jurisdiction the lower the share of
equity financing of firms residing in that jurisdiction. This may indicate
that high-tax jurisdictions deter valuable investment by multinational
enterprises because they provide incentives to locate value-driving business
parts requiring more equity financing elsewhere. |
| Keywords: |
MNE, DCF, Capital structure, Corporate income tax, Transfer pricing. |
| JEL: |
G0 H3 F2 |
| Date: |
2013–01 |
| URL: |
http://d.repec.org/n?u=RePEc:ucm:doicae:1304&r=cfn |