TY  - JOUR
AU  - Froot,Kenneth A.
AU  - Hines,James R., Jr.
TI  - Interest Allocation Rules, Financing Patterns, and the Operations of U.S. Multinationals
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4924
PY  - 1995
Y2  - October 1995
UR  - http://www.nber.org/papers/w4924
L1  - http://www.nber.org/papers/w4924.pdf
N1  - Author contact info:
Kenneth A. Froot
Graduate School of Business
Harvard University
Soldiers Field
Boston, MA 02163
Tel: 617/495-6677
Fax: 617/496-7357
E-Mail: kfroot@hbs.edu

James R. Hines
Department of Economics
University of Michigan
343 Lorch Hall
611 Tappan Street
Ann Arbor, MI  48109-1220
Tel: 734/764-2320
Fax: 734/764-2769
E-Mail: jrhines@umich.edu
M1  - published as Kenneth A. Froot, James R. Hines, Jr.. "Interest Allocation Rules, Financing Patterns, and the Operations of U.S. Multinationals," in Martin Feldstein, James R. Hines Jr., R. Glenn Hubbard, "The Effects of Taxation on Multinational Corporations" University of Chicago Press (1995)

M2  - featured in NBER digest on 1995-08-01
AB  - This paper examines the impact of the 1986 change in U.S. interest allocation rules on the investment and financing decisions of American multinationals.  The 1986 change reduced the tax deductibility of the interest expenses of firms with excess foreign tax credits.  The resulting increase in the cost of debt gives firms incentives to substitute away from using debt finance.  Furthermore, to the extent that perfect financing substitutes are not available, the overall cost of capital rises as well.  The empirical tests indicate that the loss of tax deductibility of parent-company interest expenses appears to reduce significantly borrowing and investing by firms with excess foreign tax credits.  The same firms tend to undertake new lease commitments, which may reflect the use of leases as alternatives to capital ownership.  In addition, firms affected by the tax change tend to scale back the scope of their foreign and total operations.  These results are consistent with the hypothesis that firms substitute away from debt when debt becomes more expensive, and also with the hypothesis that the loss of interest tax shields increases a firm's cost of capital.
ER  -