Brazillian Thin Capitalization Rule and the Capital Structure of Multinationals

We investigate the existence of a causal relationship between Brazilian thin capitalization rule and multinationals' capital structure by running a difference-in-differences model and matching by propensity score algorithms. Results indicate that regulation had no significant effects on firms' capital structure. A negative coefficient might indicate that the onerous debt by Total Assets ratio is decreasing in firms (partially) owned by foreign related parties anyway, while Brazilian thin capitalization rule seems to have had no improvements on the income tax revenue on that country. This investigation contributes to the current literature in the sense that it uses micro-level data to assess a group-related policy's effect on multinational firms' capital structure in a developing country. Further studies should employ micro-level intercompany debt to assess Brazilian companies' preference for debt of this nature instead of replacing it with external funds, as theory suggests.