The Effect of Industrial Diversification on Firm Taxes

50 Pages Posted: 22 Aug 2016 Last revised: 18 Oct 2018

See all articles by Kelly Wentland

Kelly Wentland

George Mason University - Department of Accounting

Date Written: October 12, 2018

Abstract

This study investigates a prediction in finance that diversified firms typically have a tax advantage over single industry firms and that the mechanism for this benefit is tied to the convexity of the tax system. Consistent with these predictions, the results suggest that diversified firms have less volatile income streams and lower tax burdens than single industry firms, on average. Further, the results show substantial variation in the tax benefit and, in some cases, a tax cost with diversification, depending on the firm’s primary industry. Findings are robust to matched sample analysis and additional controls for factors expected to influence both the decision to diversify and firm taxes. Finally, this study exploits two temporary tax law changes expected to alter the convexity of the U.S. tax system, providing evidence that the convexity mechanism is an important channel for the tax implications of diversification.

Keywords: diversification, tax, organizational structure, hedging

JEL Classification: D23, G11, H25, M41

Suggested Citation

Wentland, Kelly, The Effect of Industrial Diversification on Firm Taxes (October 12, 2018). Available at SSRN: https://ssrn.com/abstract=2826169 or http://dx.doi.org/10.2139/ssrn.2826169

Kelly Wentland (Contact Author)

George Mason University - Department of Accounting

Fairfax, VA
United States

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