F 2011 - International Tax and Business Finance (Hybrid Cross Border Finance)

Austrian Science Fund

The major focus of the research project is on finance decisions in an international context. Decision makers have to deal with economic and legal uncertainty. Legal uncertainty, regarding tax law, is particularly high in cross border scenarios. So management decisions become even more complex, when the option of hybrid finance instruments is taken into account.

Two different approaches will be used to analyze the effect of economic and tax law uncertainties on finance decisions of enterprises:

a) Simulation approach
Theoretical research shall mainly be focused on modeling hybrid finance instruments and their tax treatment in an environment under economic and legal uncertainty. By analyzing hybrid financial instruments under economic uncertainty we expect to identify constellations where hybrid finance in comparison to classical finance is less advantageous than theoretical analysis under certainty indicates. An additional major point in decision making that could explain why decision makers are reluctant to use hybrid finance, is legal uncertainty as defined above.

b) Experimental approach
While the simulation focuses on aspects of uncertainty, the experiment adds the aspect of tax complexity. In general, the determinants of using cross border finance instruments are investigated on an individual level where, specifically, the following main factors are assumed to largely affect the decision for or against hybrid finance: 1. the risk attitude of the decision maker, 2. tax complexity. Disentangling the two latter factors has been neglected in the previous literature but becomes particularly important for taking cross border finance decisions. In addition to the three main determinants, two further aspects are considered: the market context of the finance decision and legal advice, both of which are known to affect decision quality.