Debt shifting and ownership structure

Previous theoretical studies on the debt shifting behavior of multinationals have assumed affiliates of multinationals to be wholly owned. We develop a model that allows a multinational firm to determine both the leverage and ownership structure in affiliates endogenously. A main finding is that affiliates with minority owners have less debt than wholly owned affiliates and therefore a less tax-efficient financing structure. This is due to an externality that arises endogenously in our model, where costs and benefits of debt shifting are shared asymmetrically between minority and majority owners. Our findings provide a theory framework for recent empirical findings.

► We model the debt shifting behavior of multinationals. ► Multinationals determine leverage and ownership structure in affiliates endogenously. ► We show that a fiscal externality arises in affiliates benefiting minority owners. ► The externality leads to less debt in affiliates with minority owners. ► Our results explain previous empirical findings.