Ingrid Stein

Tax Incentives and Capital Structure Choice: Evidence from Germany

This paper provides new evidence that taxes affect capital structure choice, using a unique and comprehensive panel data set which covers 86,173 German non-financial firms over the years 1973-2008. Following the Graham methodology to simulate marginal tax rates, we find a statistically and economically significant positive relationship between the marginal tax benefit of debt (net and gross of investor taxes) and the debt ratio. A 10% increase in the net (gross) marginal tax benefit of debt causes a 1.5% (1.6%) increase in the debt ratio, ceteris paribus. The results are robust to various specifications like using changes in debt or debt to capital ratios. A significantly positive effect of taxes on the debt ratio can also be identified in a partial adjustment model.

Marrying and Breaking Up: Firms and their Relationship Lenders

This study analyzes the circumstances under which firms choose to have a relationship lender and under which firms switch their relationship lender. Relationship lending is measured by the largest lender’s share of debt. Our study is based on a unique dataset for Germany with more than 13,000 observations. We find that young firms and well capitalized firms are more likely to concentrate their borrowing on one bank. These two groups of firms are also more likely to switch their relationship lender. Moreover, firms concentrate their borrowing more heavily on banks with a high share of core deposits. Small firms are also more likely to stay with relationship lenders with a high share of core deposits. Finally, the proportion of debt borrowed from the relationship lender is reduced if the relationship between the lender and the borrower has been close for several years. Our findings suggest that both the decision in favor of relationship lending and the decision to switch the relationship lender are made in such a way as to balance the potential benefits and costs of a relationship lender’s access to private information.