Constant historical ownership structure

As discussed in section 4.1., the Amadeus database does not provide historical ownership data, and information on ownership structures of European firms is available only for the last reported date. An assumption about a constant historical ownership structure would lead to misclassified subsidiary-parent relations as ownership structures tend to change over time. Misclassifications arise regarding which multinational firms own which subsidiaries in the time period before the last reported year. Consequently, a significant noise can be introduced in the international debt shifting mechanisms as they depend on statutory corporate tax rates and asset shares of all affiliates that belong to the multinational corporation. In order to eliminate such misclassifications, I use the Orbis database initially to obtain historical ownership data on European firms, and afterwards link this data with financial data from the Amadeus database.

However, several authors use ownership data from the Amadeus database and assume a constant ownership structure over their sample periods. As an example, the empirical results and descriptive statistics presented by Huizinga et al. (2008) show that the authors assume a constant ownership structure over their sample period of 10 years (1994 – 2003) and do not discuss the possible biases that such an assumption might introduce. Furthermore, Dharmapala and Riedel (2013) examine income shifting of multinational firms in response to tax and assume a constant ownership structure over their sample period of 11 years (1995 – 2005). Even though the authors discuss the drawbacks of assuming a constant historical ownership structure as of the last reported date (2005 in their sample), they claim that, in line with previous studies, it is not an important concern. The authors claim that inclusion of some subsidiaries in the data sample which were not affiliated with the parent firm in the earlier years introduces noise in the estimated coefficients that leads to a downward bias in their results (p. 99). Also Budd, Konings and Slaughter (2005), examining whether multinational firms share their profits across borders during the time period from 1993 to 1998, and Miniaci, Parisi and Panteghini (2014), analysing the link between subsidiary capital structure and tax in Europe during the time period from 1998 to 2007, acknowledge that the Amadeus database does not provide historical ownership data and assume a constant ownership structure over their time periods.

In order to examine whether an assumption about a constant historical ownership structure would introduce a bias in my results, I assume that the ownership structure as of

2014 (the last year for which ownership data is available in the Orbis database) holds for the whole sample period from 2003 to 2014. Thus, I assume that subsidiary-parent relations remain constant over a period of 12 years.

The obtained results are observable in regression (2) in Table 10. Regression (1) restates the original specification of regression (2) in Table 3 to make the results more easily comparable. As observable in the table, the number of observations have increased by 22%

due to misclassifications in firms’ ownership structures over time. The new data sample includes affiliates, which were not actually affiliated with their parent firms in the earlier years. Furthermore, the number of parent firms has decreased by approximately 7%, as any parent firms and their subsidiaries that ceased their operations before 2014 are excluded from the new data sample. Only parent firms and their majority-owned subsidiaries that were active in 2014 enter the new data sample. This introduces a survivorship bias in the data sample – firms that perform worst are likely to be excluded from the sample as they no longer exist in 2014, while firms that were successful enough to survive until 2014 are included in the sample. As observable in regression (2), coefficient on the weighted tax difference variable has decreased by more than 50% and become statistically insignificant when ownership structure is assumed to be constant over the sample period of 12 years. Coefficient on the maximum tax difference variable has remained approximately constant, while coefficient on the statutory tax rate variable has increased by 6 percentage points. The substantial decrease in the estimated coefficient on the weighted tax difference variable shows the importance of correctly classified historical subsidiary-parent relations. When historical relations are misclassified, it affects the total assets of the multinational corporation, each affiliate’s share in the total assets, and the differences in statutory corporate tax rates among affiliates within the multinational group. Thus, the subsequent bias in the estimated coefficient on the weighted tax difference variable is likely to substantial.

Moreover, misclassified ownership structures are also likely to bias the coefficient on the maximum tax difference variable, as it depends on the statutory corporate tax rate of the corporation-specific lowest-taxed affiliate.

The obtained coefficients on the international tax mechanisms can also be biased downwards because minority-owned subsidiaries are included in the data sample as majority-owned subsidiaries due to misclassified subsidiary-parent relations. The parent firm is unable to substantially influence financial policies or capital structures of minority-owned subsidiaries in response to the tax mechanisms. Moreover, coordination of several owners’

interests is difficult if they face different financing and tax conditions, which leads to conflicts of interest due to different goals with respect to profit shifting and other financial choices.

In contrast to other authors who claim that misclassified subsidiary-parent relations are unlikely to be a major concern in their studies, my results show that the misclassifications introduce a bias in the estimated relation between affiliates’ leverage and tax. Bias in the estimated coefficients is particularly large bias when the independent variables are constructed based on data on all affiliates within the multinational group.

Table 10: Constant historical ownership structure

The dependent variable in the regressions is the total debt-to-asset ratio. Detailed variable definitions are given in Table 2. Regression (1) shows the results of the original specification of regression (2) in Table 3 in order to make the results more easily comparable. Regression (2) is run on a data sample that assumes a constant historical ownership structure over the sample period, based on subsidiary-parent relations as of 2014. The regressions are estimated by the ordinary least squares and include parent, industry and year fixed effects. The sample consists of affiliates of European multinational firms over 12 years (2003 – 2014). White’s (1980) heteroskedasticity-robust standard errors are reported in the parentheses. * denotes significance at 10% level,

** denotes significance at 5% level, *** denotes significance at 1% level.

(1) (2)

Original Constant historical ownership

Statutory tax rate 0.164*** 0.224***

(0.016) (0.013)

Weighted tax difference 0.054*** 0.020

(0.017) (0.014)

Maximum tax difference 0.051*** 0.050***

(0.012) (0.011)

Log (Corruption index) -0.009*** -0.026***

(0.002) (0.001)

Growth opportunities 0.022*** 0.028***

(0.002) (0.001)

Log (Creditor rights index) -0.037*** -0.029***

(0.001) (0.001)

Lowest-taxed affiliates excluded No No

Parent, industry, year fixed effects Yes Yes

Number of observations 1,039,827 1,269,198

Number of parent firms 143,405 133,478

R-squared 0.0551 0.0524