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Jennifer Blouin, Harry Huizinga, Mr. Luc Laeven, and Gaetan Nicodeme

thin capitalization rules on Tobin’s Q, debt, and interest expense at the consolidated firm level Figures 1. US affiliatesdebt ratios and corporate taxation

Jennifer Blouin, Harry Huizinga, Mr. Luc Laeven, and Gaetan Nicodeme
This paper examines the impact of thin capitalization rules that limit the tax deductibility of interest on the capital structure of the foreign affiliates of US multinationals. We construct a new data set on thin capitalization rules in 54 countries for the period 1982-2004. Using confidential data on the internal and total leverage of foreign affiliates of US multinationals, we find that thin capitalization rules significantly affect multinational firm capital structure. Specifically, restrictions on an affiliate’s debt-to-assets ratio reduce this ratio on average by 1.9%, while restrictions on an affiliate’s borrowing from the parent-to-equity ratio reduce this ratio by 6.3%. Also, restrictions on borrowing from the parent reduce the affiliate’s debt-to-assets ratio by 0.8%, which shows that rules targeting internal leverage have an indirect effect on the overall indebtedness of affiliate firms. The impact of capitalization rules on affiliate leverage is higher if their application is automatic rather than discretionary. Furthermore, thin capitalization regimes have aggregate firm effects: they reduce the firm’s aggregate interest expense but lower firm valuation. Overall, our results show than thin capitalization rules, which thus far have been understudied, have a substantial effect on the capital structure within multinational firms, with implications for the firm’s market valuation.
Jennifer Blouin, Harry Huizinga, Mr. Luc Laeven, and Gaetan Nicodeme

affiliate debt to assets. This total leverage variable is directly affected by thin capitalization regimes that restrict total debt. Second, Internal leverage is the ratio of internal debt owed to the US parent to equity, and is directly affected by thin capitalization regimes that target internal debt. 5 To gauge the broader implications of restrictions on internal debt for affiliate leverage, we in addition examine the Internal debt share , defined as the ratio of internal debt relative to total debt. From Panel A of Table 2 , we see that Total leverage, Internal

Selin Sayek, Mr. Alexander Lehmann, and Hyoung Goo Kang
We use data on the sources of debt finance of U.S. majority-owned foreign affiliates in 53 countries over the period 1983 to 2001 to examine the role of financial market development, and exposure to host country-specific risk on the financing choices of these affiliates. We find that total balance sheets are about four times as large as the cross-border component of foreign direct investment (FDI). The extent of financial leverage through local debt is positively related to host-country corporate tax rates, exchange rate variability, local currency-denominated sales, and financial development. Factors that further the role of local debt reduce that of parent company debt, and through this substitution overall leverage increases.
Selin Sayek, Mr. Alexander Lehmann, and Hyoung Goo Kang

of informational asymmetries vis-à-vis outside creditors, impeding external financing. Yet the relationship with political risk itself will be ambiguous, since of course risks such as expropriation could be hedged through local borrowing. V. E mpirical R esults A. The Data In our empirical analysis we will examine components of affiliate debt by origin, normalizing over the total stock of affiliate assets. The nature of our data does not allow us to convert reported dollar figures into local currency equivalents, so we will limit ourselves here to

Mr. Eduardo Valdivia-Velarde and Ms. Tamara Razin

unconsolidated financial statements of the resident direct investor. If this is the case, the asset side of the balance sheet may provide information on the investment in foreign affiliates (equity) and loans to foreign affiliates (debt instruments). The liability side may provide information on loans from a foreign affiliate 10 (debt instruments). The source can also provide information on resident DIENTs such as investment of direct/portfolio investors in equity , loans from the direct investors (on liability side), and loans to direct investors (assets side

Mr. Alexander Lehmann
Based on U.S. data, the returns on foreign direct investment in emerging markets are shown to be substantially higher than would be suggested by official balance of payments statistics. This paper identifies the determinants of FDI profitability in 43 industrialized and developing countries. After financial leverage and the effect of tax minimizing income transfers are controlled for, host country risk and market openness are found to raise affiliate returns on equity and returns on sales. In the context of a number of financial crises during the 1990s, income repatriations are shown to be pro-cyclical, though the effect of host country recessions is mitigated through continued spending on fixed capital and a re-direction of affiliate sales towards export markets.
Mr. Alexander Lehmann

Sales * Sales Average Assets * Average Assets Average Equity Differences in the coefficient estimates between ROE and ROS will indicate that either the asset turnover ratio or the financial leverage ratio is sensitive to some of the control variables. The left-hand side of Table 3 identifies the determinants of ROEs, averaged over the period 1991-98, with the top part for the total sample of industrialized and developing countries, and the lower part for the 23 emerging markets only. The affiliate debt

sir Frank Wakefield Holmes

, Hong Kong, Netherlands Antilles, Panama, and Singapore. The industrial country banks include certain U.S.-owned offshore affiliates. Debt Problems The largest number of countries with debt problems are low-income countries, most of them in sub-Saharan Africa. Their debt difficulties are linked with their extreme poverty and development problems. For a number of years, their income growth has lagged behind their population growth; in some cases it has even been negative. The 1981–82 recession with its low primary product prices was for many the last straw

International Monetary Fund

in 2003. 5 If the authorities were to choose a non-oil deficit target in line with permanent income, the sustainable general government budget deficit would be around 10 percent of GDP in 2004 and 2005 and would decline to around 5 percent by the end of the decade, assuming enhanced spending efficiency and stronger budgetary institutions (see Chapter V of the Selected Issues paper accompanying this report). 6 At end-2003, all public debt and about 83 percent of private sector debt were long-term. The non-guaranteed debt/reserves ratio was 3.9, with non-affiliated