Giovanna Nicodano, Luca Regis (University of Torino)

“Firm combinations, insolvency and tax policy”

abstract

This paper examines endogenous default costs in parent subsidiary structures (PS), and their sensitivity to tax policy. We show that PS lead to inefficiently high default costs relative to conglomerates when interest is deductible from taxes, due to their higher leverage. The introduction of intercorporate dividend taxation is either unable to affect private incentives to set up PS, or welfare reducing. However, private incentives may align with social optimality when intercorporate dividend taxation is accompanied by thin capitalization rules.