The Effect of Tax Avoidance Crackdown on Corporate Innovation

63 Pages Posted: 8 Dec 2020

See all articles by Qin Li

Qin Li

Hong Kong Polytechnic University

Mark (Shuai) Ma

University of Pittsburgh - Accounting Group

Terry J. Shevlin

University of California-Irvine

Date Written: November 20, 2020

Abstract

To constrain the use of intangible assets in tax-motivated state income shifting, many U.S. state governments adopted addback statutes. Addback statutes reduce the tax benefits that firms can gain from creating intangible assets such as patents. Using a sample of U.S. public firms, we examine the effect of addback statutes on corporate innovation behavior. First, the adoption of addback statutes leads to a 4.77 percentage point decrease in the number of patents and a 5.12 percentage point decrease in the number of patent citations. Second, the “disappearing patents” resulting from addback statutes have significant economic value. Third, after a state adopts an addback statute, a firm with material subsidiaries in that state assigns fewer patents to subsidiaries in zero-tax states, whereas the number of patents assigned to the other states does not change. Overall, our findings suggest that addback statutes impede corporate innovation.

Keywords: Addback Statutes, Innovation, Tax Avoidance Crackdown, Tax-Motivated Income Shifting

JEL Classification: G30; M40; H25; H71

Suggested Citation

Li, Qin and Ma, Mark (Shuai) and Shevlin, Terry J., The Effect of Tax Avoidance Crackdown on Corporate Innovation (November 20, 2020). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3734660 or http://dx.doi.org/10.2139/ssrn.3734660

Qin Li

Hong Kong Polytechnic University ( email )

Hung Hom
Hong Kong
Hong Kong

Mark (Shuai) Ma (Contact Author)

University of Pittsburgh - Accounting Group ( email )

United States

Terry J. Shevlin

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
91
Abstract Views
660
rank
320,915
PlumX Metrics