Kinky Tax Policy and Abnormal Investment Behavior

53 Pages Posted: 15 Jul 2017 Last revised: 10 May 2018

See all articles by Qiping Xu

Qiping Xu

University of Illinois Urbana Champaign

Eric Zwick

University of Chicago - Finance

Date Written: April 2018

Abstract

This paper documents tax-minimizing investment, in which firms accelerate capital purchases near fiscal year-end to reduce taxes. Between 1984 and 2013, average investment in fiscal Q4 exceeds the average of fiscal Q1 through Q3 by 37%. Q4 spikes occur in the U.S. and internationally. Research designs using variation in firm tax positions and the 1986 Tax Reform Act show that tax minimization causes spikes. Spikes increase when firms face financial constraints or higher option values of waiting. We develop an investment model with tax asymmetries to rationalize these patterns. Models without purchase-year, tax-minimization motives are unlikely to fit the data.

Keywords: Tax Policy, Business Investment

JEL Classification: G30

Suggested Citation

Xu, Qiping and Zwick, Eric, Kinky Tax Policy and Abnormal Investment Behavior (April 2018). Available at SSRN: https://ssrn.com/abstract=3002942 or http://dx.doi.org/10.2139/ssrn.3002942

Qiping Xu (Contact Author)

University of Illinois Urbana Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Eric Zwick

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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