Philipp-Bastian Brutscher, Jonas Heipertz, Christopher Hols, 23 April 2018

Despite an extensive literature examining the optimal financing mix, little work exists on firms’ preferences over specific debt financing characteristics. This column uses experimental data from Europe to analyse the link between different external financing characteristics and investment decisions. The findings suggest that modest improvements in financing terms can more than double the probability of investment. Investment decisions are particularly sensitive to interest rates and collateral requirements.

Jennifer Blouin, Harry Huizinga, Luc Laeven, Gaëtan Nicodème, 29 March 2014

Multinationals take advantage of heterogeneity in tax deduction rules by reallocating debt to high-tax countries. This reduces tax revenue and distorts the trade-off between debt and equity financing. Some countries have enacted thin capitalisation rules that restrict deductibility when the debt-to-leverage ratio exceeds a certain threshold. This column provides evidence that such rules are only effective when restrictions are automatic, rather than allowing for government discretion.

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