The Effect of Income-Shifting Aggressiveness on Corporate Investment

44 Pages Posted: 26 Aug 2018

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: August 2018

Abstract

We investigate whether intra-firm tax-motivated income shifting affects investment decisions. We model the complex interaction between two affiliates when the tax transfer price is related to an external market price. Our model predicts that increasing tax aggressiveness is associated with greater affiliate investment but lower investment efficiency. We use affiliate-level data on multinational corporations to develop a firm-specific measure of sensitivity to tax incentives to identify income-shifting aggressiveness. Using this measure, we estimate a positive relation between income-shifting aggressiveness and affiliate investment levels and a negative relation between income-shifting aggressiveness and affiliate investment efficiency. By empirically testing the theory that income-shifting aggressiveness alters equilibrium production decisions, we document that global after-tax profit maximization alters investment levels and extend the literature on investment distortions.

Keywords: Transfer Pricing, Income Shifting, Investment, Investment Efficiency

Suggested Citation

De Simone, Lisa and Klassen, Kenneth and Seidman, Jeri K., The Effect of Income-Shifting Aggressiveness on Corporate Investment (August 2018). 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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