Research (test)

Job Market Paper

Loss of Lost? Channels and Economic Consequences of Internal Capital Markets

Business groups can make use of internal capital markets to support financially distressed member firms. Such resource shifting can avoid credit-risk spillovers but might come at the cost of inefficient resource allocation. Using plausibly exogenous variation in loss-related tax incentives, I study the channels of within-group resource allocation to financially distressed firms and its impact on firm survival and productivity. Evidence from a cross-sectional difference-in-differences design based on a large international sample and a single-country regression discontinuity design suggests that business groups are more likely to avoid member firms’ defaults if the loss-related tax shields are more valuable. At the same time, groups consider the prospective tax benefits as substitutes for the internal reallocation of revenues and assets. Results further suggest that internal capital markets lead to lower firm-level productivity when group support is tax-motivated. Specifically, low-quality group firms are artificially kept alive, plausibly causing inefficient resource allocation.

  • Job Market Paper
  • Inter alia, presented at the AAA Annual Meeting (2019) and the EIASM 9th Conference on Current Research on Taxation

Papers under Review

Private Equity and Taxes

We study companies’ tax avoidance behavior after being acquired in a private equity transaction. Using firm-level data from Europe, we analyze target firms’ tax payments after the acquisition compared to a carefully selected control group in a matched-sample difference-in-differences setting. We find that target companies’ effective tax rate decreases by 16.14% relative to the unconditional mean. This finding is in line with the hypothesis that private equity investors create shareholder value by extracting money from the government. While our evidence suggests that target firms engage more heavily in profit shifting, we do not find direct evidence in support of a tax-motivated leverage channel. We further show that those target firms that become more tax efficient experience significantly lower asset and employment growth than target firms with no or moderate tax savings after the buyout. This finding indicates that tax savings are not used to finance investment but are directly transferred to shareholders.

  • Co-authored with Peter Severin (PhD student in corporate finance at University of Mannheim)
  • Inter alia, presented at the 2019 Western Finance Association Meeting, at the University of North Carolina, and Erasmus University
  • Under 1st round review at the Journal of Finance

Consumption Taxes and Corporate Tax Planning – Evidence from European Service Firms

Consumption taxes are a primary source of tax revenue in many jurisdictions. Exploiting a unique setting in Europe with 28 staggered and plausibly exogenous value-added tax rate changes, this study examines the effect of consumption taxes on corporate tax planning. We find that service firms report 0.5 percent less in sales if consumption taxes increase by one percentage point. Consistent with incentives for tax planning and economic theory, the effect is stronger for firms with greater discretion over where to pay value-added taxes and firms bearing a greater part of the tax burden. We then show that the extent and the channels of profit shifting depend on firms’ responsiveness to consumption taxes, suggesting that consumption taxes place a constraint on corporate income tax planning.

  • Co-authored with Ann-Catherin Werner (PhD student at University of Mannheim)
  • Revising for resubmission to the Journal of Accounting and Economics

Working Papers

Real Effects of Private Country-by-Country Disclosure

We investigate the effects of mandatory private Country-by-Country (CbC) disclosure to tax authorities on corporate transparency and economic activity. Using rich data on the operations of multinational firms, we exploit the threshold-based application of this 2016 disclosure rule in a regression discontinuity design. We find strong evidence that firms affected by the disclosure mandate reduce ownership in tax haven subsidiaries and thereby increase transparency in their previously opaque organizational structure. We also document, on average, that affected firms invest less in aggregate employment. However, affected firms increasingly allocate revenue, employment, and total assets to subsidiaries in European low-tax countries. We observe increased subsidiary-level revenue and employment only for subsidiaries located in European countries with relatively low tax rates, if the firm has tax haven operations, if the firms is diversified, and if the firm is public. In contrast, mandatory CbC disclosure seems to have little effect on consolidated tax payments. Collectively, our findings suggest that mandatory CbC disclosure helps increase corporate transparency and plausibly curbs the most aggressive tax planning achieved through tax haven operations. However, CbC disclosure has unintended adverse effects on employment as a whole and on the tax-motivated shifting of real economic activity.

  • Co-authored with Lisa de Simone (Stanford University, Graduate School of Business)
  • Preparing for submission to the Journal of Accounting Research

Tax Competition and Employment

TO BE UPDATED….Consumption taxes are a primary source of tax revenue in many jurisdictions. Exploiting a unique setting in Europe with 28 staggered and plausibly exogenous value-added tax rate changes, this study examines the effect of consumption taxes on corporate tax planning. We find that service firms report 0.5 percent less in sales if consumption taxes increase by one percentage point. Consistent with incentives for tax planning and economic theory, the effect is stronger for firms with greater discretion over where to pay value-added taxes and firms bearing a greater part of the tax burden. We then show that the extent and the channels of profit shifting depend on firms’ responsiveness to consumption taxes, suggesting that consumption taxes place a constraint on corporate income tax planning.

  • Co-authored with Stephen Glaeser (University of North Carolina at Chapel Hill) and Ann-Catherin Werner (PhD student at University of Mannheim)
  • Preparing for submission to the Journal of Accounting Research

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