The Real Effects of Interest Limitation Rules: Evidence from M&A Investments
Speaker(s)
Discussant(s)
Authors:
Eliezer M. Fich, Drexel University - Department of Finance; European Corporate Governance Institute (ECGI)
Lisa Hillmann, WHU - Otto Beisheim School of Management
Johanna Kling, WHU - Otto Beisheim School of Management
Barbara Stage, WHU - Otto Beisheim School of Management
We examine the impact of rules limiting the tax deductibility of interest expenses on merger and acquisition (M&A) investments. These rules aim to curb excessive debt financing and debt-shifting incentives. However, debt is crucial for cash-financed M&A deals. Using data from 43 countries, we find that interest expense limitation rules are associated with reduced M&A activity. M&A transactions completed after these rules take effect exhibit lower deal values and inferior quality. This evidence highlights the unintended consequences of anti-tax avoidance regulations, supporting the hypothesis that by increasing the cost of debt financing, these regulations distort resource allocation in the economy.