Innovation, Tax Aggressiveness, and Stock Price Crash Risk

60 Pages Posted: 28 Jan 2018

See all articles by C.S. Agnes Cheng

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance

Peng Guo

Michigan Technological University

Chia-Hsiang Weng

National Chengchi University (NCCU) - Department of Accounting

Qiang Wu

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Date Written: January 19, 2018

Abstract

Presumably, more R&D should lead to lower taxes due to tax credits and tax deductions and more patents should lead to higher taxes due to increased revenue. Many previous studies find that higher R&D indeed leads to lower taxes. However, studies also show that more patents are associated with lower taxes. One reason can be that firms use patents to shift income across the borders. Accordingly, we predict and find that multinational companies (MNCs) with more patents avoid more taxes. Specifically, we provide large-sample evidence that MNCs with more patents use income-shifting tactics aggressively to avoid taxes. As domestic firms cannot shift income across the borders, we find that domestic firms with more patents actually pay more taxes. Moreover, we find that tax avoidance resulting from income-shifting tactics predicts future stock price crash risk, but we do not find such an effect for tax avoidance due to R&D.

Keywords: Tax Avoidance, Income Shifting, Innovative Firms, Patent, Transfer Pricing, Stock Price Crash Risk

JEL Classification: H20, M41, O30

Suggested Citation

Cheng, C.S. Agnes and Guo, Peng and Weng, Chia-Hsiang and Wu, Qiang, Innovation, Tax Aggressiveness, and Stock Price Crash Risk (January 19, 2018). Available at SSRN: https://ssrn.com/abstract=3105186 or http://dx.doi.org/10.2139/ssrn.3105186

C.S. Agnes Cheng (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Peng Guo

Michigan Technological University ( email )

Houghton, MI 49931
United States

Chia-Hsiang Weng

National Chengchi University (NCCU) - Department of Accounting ( email )

No. 64, Sec 2
Chih-Nan Road
Wenshan, Taipei
Taiwan

Qiang Wu

Rensselaer Polytechnic Institute (RPI) - Lally School of Management ( email )

110 8th St
Troy, NY 12180
United States
518-276-3338 (Phone)
518-276-8661 (Fax)

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