02014cas a2200253 a 4500 AALejournalIMF017393 230101c9999 xx r poo 0 0eng d 5.00 USD 9781475573053 1018-5941 BD-DhAAL BD-DhAAL Mooij, Ruud A. Curbing Corporate Debt Bias / Ruud A. Mooij, Shafik Hebous. Washington, D.C. : International Monetary Fund, 2017. 1 online resource (20 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students Tax provisions favoring corporate debt over equity finance ('debt bias') are widely recognized as a risk to financial stability. This paper explores whether and how thin-capitalization rules, which restrict interest deductibility beyond a certain amount, affect corporate debt ratios and mitigate financial stability risk. We find that rules targeted at related party borrowing (the majority of today's rules) have no significant impact on debt bias-which relates to third-party borrowing. Also, these rules have no effect on broader indicators of firm financial distress. Rules applying to all debt, in contrast, turn out to be effective: the presence of such a rule reduces the debt-asset ratio in an average company by 5 percentage points; and they reduce the probability for a firm to be in financial distress by 5 percent. Debt ratios are found to be more responsive to thin capitalization rules in industries characterized by a high share of tangible assets. Mode of access: Internet Hebous, Shafik. IMF Working Papers; Working Paper ; No. 2017/022 Full text available on IMF http://elibrary.imf.org/view/journals/001/2017/022/001.2017.issue-022-en.xml IMF e-Library