The Effect of Income-Shifting Aggressiveness on Corporate Investment

63 Pages Posted: 26 Aug 2018 Last revised: 8 Mar 2022

See all articles by Lisa De Simone

Lisa De Simone

University of Texas at Austin

Kenneth J. Klassen

University of Waterloo - School of Accounting and Finance

Jeri K. Seidman

University of Virginia - McIntire School of Commerce

Date Written: February 16, 2022

Abstract

We investigate whether international income-shifting aggressiveness affects local investments. Amid heightened scrutiny of international activities by tax authorities, firms can support income-shifting goals by locating investments consistent with reported income. As a consequence, we predict firms that aggressively shift income will make affiliate-level investment decisions less influenced by local investment opportunities than firms that do not aggressively shift income. We use affiliate-level data from multinational corporations to develop a firm-year proxy for the sensitivity of reported income to cross-border tax incentives. Results suggest firm-years with below-median income-shifting aggressiveness exhibit a typical responsiveness of local investments to investment opportunities, but firm-years with above-median income-shifting aggressiveness exhibit no statistical relation. Consistent with expectations, these results are stronger for firms with better governance or subject to greater tax authority scrutiny. Our tests extend the literature on investment distortions by documenting that multinational corporations’ international tax considerations alter their local 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 (February 16, 2022). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3232036 or http://dx.doi.org/10.2139/ssrn.3232036

Lisa De Simone

University of Texas at Austin ( email )

2110 SPEEDWAY
Stop B6400
Austin, TX 78705
United States

HOME PAGE: http://www.lisa-desimone.com

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

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
334
Abstract Views
2,126
rank
124,513
PlumX Metrics