Thin Capitalization Rules The text briefly discusses thin

Thin Capitalization Rules

The text briefly discusses thin capitalization in the “Debt in the Capital Structure” section. According to the text, thin capitalization occurs when the amount of debt owed by a corporation to its shareholders grows relatively large compared to the shareholder equity. The article I found explores the effects of thin-capitalization rules (e.g. limits on tax deductibility of interest cost) on multinational corporations (MNCs). The specific effect being examined is where MNCs decide to locate foreign entities. Not surprisingly, the authors discovered that countries with lower taxes and less stringent thin-capitalization rules prompt MNCs to establish their first foreign affiliates there. The paper goes on to examine whether location decisions are more sensitive to tax rate changes or thin-capitalization rule changes. Since tax rates are more widely discussed among economists and laymen alike, I was not terribly shocked by the finding that the location decision is more strongly impacted by tax rate changes. Although the conclusions of this article were somewhat intuitive, the discussion of thin capitalization throughout helped me gain a more thorough understanding of the term.

Can someone expound on this?