Innovation, Tax Aggressiveness, and Stock Price Crash Risk
60 Pages Posted: 28 Jan 2018
Date Written: January 19, 2018
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
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