The Effect of Income-Shifting Aggressiveness on Corporate Investment

41 Pages Posted: 26 Aug 2018 Last revised: 8 Dec 2019

See all articles by Lisa De Simone

Lisa De Simone

Stanford Graduate School of Business

Kenneth J. Klassen

University of Waterloo - School of Accounting and Finance

Jeri K. Seidman

University of Virginia - McIntire School of Commerce

Date Written: September 2019

Abstract

Do firms balance tax and operating considerations when making investment decisions? We investigate whether income-shifting aggressiveness affects new investments and predict firms that aggressively shift income will choose affiliate-level investments driven less by local investment opportunities. We use affiliate-level data from multinational corporations to develop a firm-specific measure of the sensitivity of reported profits to cross-border tax incentives. Results suggest firms with below-median income-shifting aggressiveness exhibit the typical positive relation between investment opportunities and investment level, but firms with above-median income-shifting aggressiveness exhibit no statistical relation. Our tests extend the literature on investment distortions by documenting that multinational corporations’ international tax considerations alter their tangible investment decisions.

Keywords: Investment, tax aggressiveness, income shifting

Suggested Citation

De Simone, Lisa and Klassen, Kenneth and Seidman, Jeri K., The Effect of Income-Shifting Aggressiveness on Corporate Investment (September 2019). Stanford University Graduate School of Business Research Paper No. 18-38. Available at SSRN: https://ssrn.com/abstract=3232036 or http://dx.doi.org/10.2139/ssrn.3232036

Lisa De Simone

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-3874 (Phone)
650-724-3083 (Fax)

HOME PAGE: http://www.gsb.stanford.edu/faculty-research/faculty/lisa-de-simone

Kenneth Klassen

University of Waterloo - School of Accounting and Finance ( email )

Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x38550 (Phone)
519-888-7562 (Fax)

Jeri K. Seidman (Contact Author)

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States

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