Job Market Paper

Loss or Lost? Economic Consequences of Internal Capital Markets in Business Groups
This paper examines when business groups support distressed member firms and how such group support impacts firm survival and productivity. I exploit plausibly exogenous variation in the value of loss-related tax shields that affect the incentives to support distressed member firms. Evidence from a cross-sectional difference-in-differences design based on a large international sample, as well as a single-country regression discontinuity design, suggests that business groups avoid member firms’ defaults if loss-related tax shields are more valuable. This tax-motivated group support keeps low-quality member firms alive, resulting in lower productivity at the firm and the market level. The findings indicate that managers exploit tax-related cash incentives through internal capital markets at the cost of less efficient resource allocation.

Online Appendix

Working Papers

Real Effects of Private Country-by-Country Disclosure
(with Lisa De Simone)

We investigate the effects of mandatory private Country-by-Country (CbC) disclosure to European tax authorities on 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 evidence consistent with firms affected by the disclosure mandate reducing ownership in tax haven subsidiaries relative to unaffected firms and thereby increasing transparency in their previously opaque organizational structure. We also observe that affected firms increasingly allocate revenue, employment, total assets, and, correspondingly, tax payments to subsidiaries in low-tax European countries. Additional tests at the consolidated firm-level and at the subsidiary-level support the conclusion that firms shift real activities away from operations outside Europe – including from tax havens – to Europe, particularly to non-haven European countries with low corporate income tax rates. Collectively, our findings suggest that mandatory CbC disclosure curbs the most aggressive tax planning achieved through tax haven operations but also affects the allocation of multinationals’ real economic activities.

Online Appendix

Tax Competition and Employment
(with Stephen Glaeser and Ann-Catherin Werner)

We examine the effects of international tax competition on domestic employment. We find that increases in corporate statutory tax rate differentials between domestic and foreign firms reduce domestic employment through the distinct channels of import competition and competition from foreign owned domestic firms. These effects are stronger for domestic firms located in countries with less labor organization, non-service firms, firms with fewer intangible assets, and standalone firms. International tax competition appears to primarily affect domestic employment via changes in within-firm employment at smaller firms. Our results suggest that international tax competition can affect domestic employment even when domestic capital or income is immobile.

Online Appendix
– Presented at the Conference on Financial Economics and Accounting (CFEA 2019)
– under review

Consumption Taxes and Corporate Tax Planning – Evidence from European Service Firms
(with Ann-Catherin Werner)

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.

Private Equity and Taxes
(with Peter Severin)

We study companies’ tax avoidance behavior after being acquired in a private equity transaction. Exploiting rich European firm-level data in a matched-sample difference-in-differences setting, we find that target companies’ effective tax rates decrease by 13 percent. 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 strong evidence for a tax-motivated leverage channel. Target firms experience lower asset and productivity growth when they engage in significant tax avoidance after the deal. This finding indicates that tax savings are not used to finance investment but are directly transferred to shareholders.

– Presented at the Western Finance Association Annual Meeting 2019