Capital Structure and International Debt Shifting: A Comment

In a recent article, Huizinga, Laeven and Nicodème (2008) presenta novel model that motivates an extensive empirical analysis of internationaldebt shifting. We point out that the model fails to accountfor internal debt, and that once internal debt is properly accountedfor, the external debt mechanism they propose is not identified in theempirical analysis. We also point out that affiliate specific debt costsreduce affiliate dividends. When this is implemented in the model,their regression equation can only be derived under the very restrictiveassumption that effective tax rates on dividends are the same inall countries