Establecimiento de objetivos (por cada sesión)

As discussed in section 6.4., loss carry-forward dummy variable enters the regression with a positive sign, which suggests that the dummy variable explains specific characteristics of the firm, for example, its expected performance, which may indicate a positive relation between firm’s loss carry-forwards and its financial leverage. Also, firms with loss carry- forwards are likely to have no retained earnings, less equity and more incentives to use debt to finance their activities. However, as discussed by Büttner, Overesch and Wamser (2011), affiliates with loss carry-forwards have less incentives to engage in tax avoidance, as loss carry-forwards act as non-debt tax shields and offset affiliates’ taxable profits. The authors use an interaction term between statutory corporate tax rate and loss carry-forward dummy in their analysis and find that the there exists a significant negative effect of loss carry- forward on tax elasticity of debt-to-asset ratio (p. 118).

In order to examine whether loss carry-forwards affect tax elasticity of debt negatively in my data sample as well, I create interaction terms between all three tax mechanisms and the loss carry-forward dummy. Regression (1) in Table 13 restates the original specification of regression (2) in Table 3 to make the results more easily comparable. As observable in regression (2) which includes the loss carry-forward interaction terms, the interaction term between statutory tax rate and loss carry-forward, and between weighted tax difference and loss carry-forward affect affiliates’ leverage negatively. The interaction term between maximum tax difference and loss carry-forward affects affiliates’ leverage positively; however, coefficient on the maximum tax difference variable alone has decreased by 4 percentage points and become statistically insignificant after inclusion of interaction terms in the specification.

Hence, my results confirm a significant adverse effect of loss carry-forward on the estimated effect of corporate tax rate and weighted tax difference variables on affiliates’ total leverage. Regression (2) suggests that if an affiliate has losses to be carried forward, the effect of statutory tax rate on its total debt-to-asset ratio decreases by approximately 62%, while the effect of weighted tax difference variable decreases by approximately 265% and becomes negative. Finally, the effect of maximum tax difference variable increases substantially and becomes statistically significant at 1%. These findings seem to be particularly relevant because approximately 23% of affiliates in the main data sample have loss carry-forwards. The standard debt tax shield and external debt shifting mechanisms are less important for

leverage decisions of affiliates with loss carry-forwards, while internal debt shifting mechanism is more important for their leverage decisions than for affiliates that do not report loss carry-forwards. The increased effect of maximum tax difference variable on loss-making affiliates’ leverage suggests that multinational firms tend to use internal debt to finance loss- making affiliates.

Finally, I divide the data sample into two parts – the affiliates that report loss carry- forwards and the affiliates that do not report loss carry-forwards, to examine whether effects of the tax mechanisms on affiliates’ total leverage differ between these affiliates. Regression (3) is run on affiliates without loss carry-forwards, while regression (4) is run on affiliates with loss carry-forwards. As observable in the table, the estimated coefficients on statutory corporate tax rate and weighted tax difference variables are smaller and statistically insignificant for the sample of affiliates with loss carry-forwards, as compared to the sample of affiliates without loss carry-forwards. However, the estimated coefficient on maximum tax difference variable is slightly larger for the sample of affiliates with loss carry-forwards. Hence, these findings confirm the results obtained above – leverage of affiliates with loss carry-forwards is less responsive to variation in corporate tax rate and weighted tax difference variables, and more responsive to variation in maximum tax difference variable than leverage of affiliates without loss carry-forwards.

In line with Büttner et al. (2011), these findings exhibit an implication for tax policies. As firms with loss carry-forwards are less willing to use more debt or engage in external debt shifting in response to tax incentives, the use of debt for tax avoidance activities should decrease during or after a financial crisis or a cyclical downturn in the economy. Thus, in case of a financial downturn, the anti-tax avoidance rules, such as thin capitalization regulations or earnings stripping rules, could be relaxed, as these regulations are based on the assumption that multinational firms use debt extensively to shift debt and avoid taxes (p. 118).

Table 13: Loss carry-forwards

The dependent variable in all regressions is the total debt-to-asset ratio. Detailed variable definitions are given in Table 2. Regression (1) shows the results of the original specification of regression (2) in Table 3 in order to make the results more easily comparable. Regression (2) includes loss carry-forward interaction terms to examine whether tax elasticity of debt differs for firms with loss carry-forwards. Regression (3) is run on affiliates without loss carry-forwards, and regression (4) is run on affiliates with loss carry-forwards. The regressions are estimated by the ordinary least squares and include parent, industry and year fixed effects. The sample consists of majority-owned affiliates of European multinational firms over 12 years (2003 – 2014). White’s (1980) heteroskedasticity-robust standard errors are reported in the parentheses. * denotes significance at 10% level, ** denotes significance at 5% level, *** denotes significance at 1% level.

(1) (2) (3) (4) Original Loss carry- forward interactions Affiliates without loss carry-forwards

Affiliates with loss carry-forwards Statutory tax rate 0.164*** 0.185*** 0.222*** -0.035 (0.016) (0.016) (0.018) (0.039) Weighted tax difference 0.054*** 0.141*** 0.058*** 0.012 (0.017) (0.018) (0.018) (0.036) Maximum tax difference 0.051*** 0.011 0.045*** 0.049*** (0.012) (0.012) (0.013) (0.021) Statutory tax rate * Loss carry-

forward -0.115***

(0.013) Weighted tax difference * Loss

carry-forward -0.375***

(0.022) Maximum tax difference * Loss

carry-forward 0.182***

(0.012)

Fixed asset ratio -0.065*** -0.065*** -0.069*** -0.069*** (0.002) (0.002) (0.002) (0.004) Log (Sales) 0.027*** 0.028*** 0.028*** 0.027*** (0.000) (0.000) (0.000) (0.001) Loss carry-forward 0.093*** 0.110*** (0.001) (0.003) Profitability -0.044*** -0.043*** -0.051*** -0.019*** (0.001) (0.001) (0.002) (0.003) Inflation 0.001*** 0.001*** 0.001*** -0.000 (0.000) (0.000) (0.000) (0.001) Log (Corruption index) -0.009*** -0.009*** -0.004* -0.018*** (0.002) (0.002) (0.002) (0.004) Growth opportunities 0.022*** 0.022*** 0.023*** 0.023*** (0.002) (0.002) (0.002) (0.004) Log (Creditor rights index) -0.037*** -0.037*** -0.038*** -0.031*** (0.001) (0.001) (0.002) (0.004) Lowest-taxed affiliates

excluded No No No No

Parent, industry, year fixed

Table 13 (continued) (1) (2) (3) (4) Original Loss carry- forward interactions Affiliates without loss carry-forwards

Affiliates with loss carry-forwards Number of observations 1,039,827 1,039,827 801,434 238,393 Number of parent firms 143,405 143,405 125,5507 64,358

R-squared 0.0551 0.0552 0.0443 0.0679