The Effect of Taxes on Corporate Financing Decisions - Evidence from the German Interest Barrier

Stephan Alberternst, Caren Sureth-Sloane

Publication: Working/Discussion PaperWU Working Paper


The literature suggests that when taking tax effects into account, debt ought to be preferable
to equity. Thus, with all else being equal, levered firms are expected to show higher firm values.
However, there are no uniform predictions of the size of this tax benefit from interest deductibility
nor on the effect of changes in interest deductibility. We believe that the German corporate tax reform
in 2008, which introduced an interest barrier, can serve as a promising "quasiexperiment" to investigate the effects from a reform of interest deductibility. A study of this reform on the basis of German financial statement data is of general interest because, first, similar interest barriers have been introduced in several countries and proposed by the OECD to fight BEPS. Second, the major
characteristics of the German tax system can be regarded as representative for most European and major Asian countries. Third, single entity financial statements for German companies allows us to capture tax and capital structure details that have not been available in most prior studies. With significance at the 5% level, we find evidence that the companies that are affected by the interest barrier reduce their leverage by 4.7 percentage points more than companies that are not affected by the interest barrier. We are the first to employ a detailed matching approach to the underlying rich dataset, which enables us to overcome several limitations of previous studies. Our results imply that capital structure reactions most likely have been underestimated in previous studies.
Original languageEnglish
Place of PublicationVienna
PublisherWU Vienna University of Economics and Business
Publication statusPublished - 2015

Publication series

NameWU International Taxation Research Paper Series

WU Working Paper Series

  • WU International Taxation Research Paper Series

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