The influence of income taxation on the choice of capital structure of the affiliates of Brazilian multinational groups
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2024-02-06
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Sheng, Hsia Hua
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Since the seminal article by Modigliani and Miller in the 1950s, the benefit of deducting interest on income tax, known as tax shield, has been studied in corporate finance. In 2004, Desai, Foley and Hines Jr. addressed the same issue but in multinational groups and accentuating the fact that in business groups there are several companies with individual capital structures and that they are subject to income taxation according to the laws of each country in which they operate. Brazilian multinational groups tend to have a different capital structure than multinational groups from developed countries. There is a more limited capital market in Brazil compared to developed countries, and the largest Brazilian groups have accessed global markets by issuing debt in the form of corporates bonds by affiliates abroad with the Brazilian controlling company as guarantor. This article analyzes the capital structures of Brazilian multinational companies considering the separate entity approach and the internal capital markets of multinational companies by using a linear regression (OLS) model applied on the financial data in the period between 2015 and 2021. We were able to find that the income tax rates of the countries in which the affiliates of Brazilian multinational groups operate influence the financial leverage of the affiliates. In this sense, it was shown that 10% higher income tax rates are associated with an increase of leverage of 9.8% in the cases of Brazilian multinational companies that issued corporate bonds on the international market. These results are in the same direction as those documented in the specialized literature, only more pronounced.