Investor protection,taxation, and dividends

We test the impact of taxes and governance systems on dividend payouts across countries. We show that, unlike previous studies, firms in strong investor protection countries pay lower cash dividends than in weak protection countries when the classical tax system is implemented, but they repurchase more shares to maximise their shareholders' after-tax returns. In weak protection countries, cash dividends and repurchases are low and less responsive to taxes. Our results suggest that when investors are protected, they weigh the tax cost of dividends against the benefit of mitigating the agency cost, but, when they are not, they accept whatever dividends they can extract, even when this entails high tax costs.     

Investment timing,liquidity, and agency costs of debt

This paper examines the effect of debt and liquidity on corporate investment in a continuous-time framework. We show that stockholder–bondholder agency conflicts cause investment thresholds to be U-shaped in leverage and decreasing in liquidity. In the absence of tax effects, we derive the optimal level of liquid funds that eliminates agency costs by implementing the first-best investment policy for a given capital structure. In a second step we generalize the framework by introducing a tax advantage of debt, and we show that an interior solution for liquidity and capital structure optimally trades off tax benefits and agency costs of debt.     

Taxation and skills investment in frictional labor markets

This paper examines the effects of wage taxation and corporate income taxation on training investment in frictional labor markets. Because of labor market frictions, the wage structure is compressed and workers do not capture the entire return from their skills. As a result, both firms and workers have incentives to support part of the costs of training investments. The analysis shows that when decisions to invest in training are made by firms and workers acting cooperatively, a wage tax increases the level of investment in skills whereas a corporate income tax decreases it. In this case, the introduction of a small wage tax unambiguously increases efficiency. The effects of both types of taxes on training are reversed when investment decisions are taken by firms alone. In any case, a corporate income tax is not neutral with respect to decisions to invest in skills even if the full cost of investment is deducted from taxable income in the period when it is incurred and the tax system provides full loss offset.     

Tax avoidance and the cost of debt for SMEs: Evidence from Spain

We investigate the effect of tax avoidance on the cost of debt for SMEs. Tax avoidance may increase a firm’s cash flows on one hand, but also increase the agency costs, the information risk, and the risk of scrutiny by tax authorities on the other, affecting the cost of debt in opposing ways. Using a sample of Spanish SMEs for the period 2007–2019, our findings show that tax-avoiding SMEs face lower debt costs, suggesting that the positive effects of tax avoidance prevail over the negative ones for SMEs. This finding is consistent with a more favourable assessment of SMEs’ tax avoidance activities by their key finance providers (banks), given SME unique characteristics and their lower agency costs.     

Agency costs,taxes and debt: The UK evidence

This paper provides an empirical examination of the impact of the corporation tax and agency costs on firms' capital structure decisions. Our evidence suggests that the agency costs are the main determinants of corporate borrowing. Consistent with the agency theory, we find that firms that have fewer growth options have more debt in their capital structure. Moreover, our results show that debt mitigates the free cash flow problem and that firms that are more likely to be diversified and less prone to bankruptcy are highly geared. the negative effect of insider shareholding on leverage disappears, however; when all the agency mechanisms are accounted for. In addition, we find that, in the long run, companies that are tax exhausted exhibit significantly lower debt ratios than tax-paying firms. However, in the short run, firms' capital structure decisions are not affected by taxation.     

The effectiveness of tax incentives in attracting investment: panel data evidence from the CFA Franc zone

In this paper we investigate to what extent tax incentives are effective in attracting investment in Sub-Saharan Africa. We test the neo-classical investment theory prediction that tax incentives, by lowering the user cost of capital, raise investment. Next to tax incentives, we also estimate the impact on investment of other investment climate variables that are under direct control of the government, such as the transparency and complexity of the tax system, and the legal protection of foreign investors. In developing countries these variables might be as important as or even more important than the tax variables themselves.     

Are family firms more tax aggressive than non-family firms?

Taxes represent a significant cost to the firm and shareholders, and it is generally expected that shareholders prefer tax aggressiveness. However, this argument ignores potential non-tax costs that can accompany tax aggressiveness, especially those arising from agency problems. Firms owned/run by founding family members are characterized by a unique agency conflict between dominant and small shareholders. Using multiple measures to capture tax aggressiveness and founding family presence, we find that family firms are less tax aggressive than their non-family counterparts, ceteris paribus. This result suggests that family owners are willing to forgo tax benefits to avoid the non-tax cost of a potential price discount, which can arise from minority shareholders’ concern with family rent-seeking masked by tax avoidance activities [Desai and Dharmapala, 2006. Corporate tax avoidance and high-powered incentives. Journal of Financial Economics 79, 145–179]. Our result is also consistent with family owners being more concerned with the potential penalty and reputation damage from an IRS audit than non-family firms. We obtain similar inferences when using a small sample of tax shelter cases.     

Capital, corporate income taxes, and catastrophe insurance

We provide estimates of the equity capital needed and the resulting tax costs incurred when supplying catastrophe insurance/reinsurance using a partial equilibrium model that incorporates a specific loss distribution for US catastrophe losses. After consideration of insurer investment in tax-exempt securities, tax loss carry-back/forward provisions, and personal taxes, our results imply that the tax costs of equity finance alone have a substantial effect on the cost of supplying catastrophe reinsurance. These results help explain a variety of industry developments that reduce tax costs. Also, when coupled with non-tax costs of capital, these results help explain the limited scope of catastrophe insurance/reinsurance.     

Investment timing and optimal capital structure under liquidity risk

Deterioration in debt market liquidity reduces debt values and affects firms' decisions. Considering such risk, we develop an investment timing model and obtain analytic solutions. We carry out a comprehensive analysis in optimal financing, default, and investment strategies, and stockholder–bondholder conflicts. Our model explains stylized facts and replicates empirical findings in credit spreads. We obtain six new insights for decision makers. We propose a ‘new trade-off theory’ for optimal capital structure, a new tax effect, and new explanations of ‘debt conservatism puzzle’ and ‘zero-leverage puzzle’. Failure in recognizing liquidity risk results in substantially over-leveraging, early bankruptcy or investment, overpriced options, and undervalued coupons and credit spreads. In addition, agency costs are surprisingly small for a high liquidity risk or a low project risk. Interestingly, the risk shifting incentive and debt overhang problem decrease with liquidity risk under moderate tax rates while they increase under high tax rates.     

Do corporate tax cuts increase investments?

This paper studies the effect of corporate taxes on investment. Since firms with a foreign parent have more cross-country profit shifting opportunities than domestically owned firms do, their effective tax rate and, consequently, their tax-induced costs to investment are lower. We therefore expect capital investment responses to a corporate tax cut to be heterogeneous across firms. Using firm-level data on German corporations, we exploit the 2008 tax reform, which substantially cut corporate taxes as an exogenous policy shock and expect domestically owned firms' investments to be more responsive to the reform. We show exactly this in a difference-in-differences setting. We find that the reduction in corporate tax payments led to a one-to-one increase in the real investments of domestic firms. The effect is stronger for domestic firms relying more on internal funds. Correspondingly, labor investment increased more for domestic firms, ensuring a constant mix of input factors. In addition, we show that domestic firms' sales grew faster after the tax cut than the sales of foreign-owned firms. Our results imply that corporate tax changes can increase corporate investment but that domestic firms benefit more than foreign-owned firms from a tax cut through higher investment responses resulting in greater sales growth.     

THE DIVIDEND PAYOUTS OF PRIVATE FIRMS: EVIDENCE FROM TAX COURT DECISIONS

To study the dividend payouts of private firms we extend the agency cost/external financing cost trade-off model of dividend payouts to include the accumulated earnings tax (AET). The firm's optimal dividend policy trades off the benefits from lower agency costs against external financing costs and the AET. Information from tax court records reveals that private firms' payouts are influenced by both agency costs and the AET.     

Personal taxes,cost of insurer equity capital,and the case of offshore hedge fund reinsurers

Insurer investment returns are taxed in the United States at the corporate level and at the personal level when they are distributed to shareholders. This paper examines the implications of personal taxes for the tax cost on insurers equity capital and how these tax costs have varied over time under different tax regimes and with different asset portfolios. The paper also discusses how personal taxes provide tax incentives to form offshore hedge fund reinsurers, which provide an interesting case study illustrating the relevance of personal taxes. Finally, the paper discusses the tax treatment of alternative capital arrangements, such as collateralized reinsurance and sidecars.     

On the Relevance of Debt Maturity Structure

In this paper, we present a tax-induced framework to analyze debt maturity problems. We show that under some modifications of the existing U.S. tax code, debt maturity is irrelevant even in the presence of taxes and bankruptcy costs that yield an optimal capital structure. If this restrictive structure is relaxed, and assuming the Miller [15] equilibrium does not prevail, tax reasons would usually imply the existence of an optimal debt maturity structure. If there exists a gain from leverage, then an increasing term structure of interest rates, adjusted for default risk, results in long-term debt being optimal. A decreasing term structure, under similar circumstances, renders short-term debt optimal. In the absence of agency costs, a Miller [15]-type result emerges at equilibrium and irrelevance prevails. We also argue that agency costs could again reverse the irrelevance and imply a firm-specific optimal debt maturity structure.     

Taxes and production: The case of Pakistan

This paper investigates the effectiveness of investment incentives and corporate income taxes in influencing production and investment decisions in the Pakistani wearing apparel and leather products industries. Three tax instruments are considered: the corporate income tax (CIT), the investment tax credit (ITC), and the capital cost allowance (CCA).The results show that since there are significant capital adjustment costs, it is important to distinguish between the short, intermediate, and long-run effects associated with the tax instruments. Production decisions are relatively more responsive to changes in the ITC rate compared to changes in either CCA or CIT rates in each run. However, only in the long run for the apparel industry are the ITC and CCA rates cost effective in stimulating investment. The CIT is never cost effective. Thus targeted instruments outperform the general CIT instrument. In addition, although the incentive to invest is enhanced, there is little effect on output. Therefore, tax incentives essentially make production techniques more capital intensive.     

Compliance Costs of Corporate Income Taxation in Singapore

This study is the second in a series of studies investigating tax compliance costs incurred by public-listed companies. We found evidence of a size effect which is a predominant finding of similar studies. The size effect was more pronounced when absolute measures of costs were used than when a relative measure, cost/sales turnover, was used. Additional evidence was found of limited success relating to the IRAS's moves to simplify the tax system. Specifically, only large companies with sales turnover exceeding $500m benefited and considerably reduced their overall compliance costs. Most of the decrease was a result of the computational component of compliance costs. This resulted in the gap in absolute costs narrowing between Group 3 and any of the other categories of companies. There was also greater reliance on external professionals, the smaller the company. Views elicited indicate that more could be done to increase accessibility to IRAS publications for Group 1 and Group 2 companies.     

Tax credit rating and corporate innovation decisions

The tax credit rating mechanism was formally implemented in 2014. As an important tax collection and management innovation, it has attracted the attention of regulatory authorities and scholars. Different from the literature that directly examines corporate tax compliance, we focus on the impact of tax credit rating implementation on corporate research and development (R&D) investment decisions. Using listed companies’ data from 2014 to 2019, we find that companies with higher tax credit ratings invest more in innovation, because the system helps managers identify R&D opportunities, alleviates corporate financing constraints and reduces agency costs. We confirm that tax credit ratings have manifold impacts on corporate information environments and business decisions, with better ratings positively affecting firms’ business decisions. This discovery can inform tax policy reform, encourage corporate innovation and construct social credit systems.     

Agency Costs, Risk Management, and Capital Structure

The joint determination of capital structure and investment risk is examined. Optimal capital structure reflects both the tax advantages of debt less default costs (Modigliani and Miller (1958, 1963)), and the agency costs resulting from asset substitution (Jensen and Meckling (1976)). Agency costs restrict leverage and debt maturity and increase yield spreads, but their importance is small for the range of environments considered. Risk management is also examined. Hedging permits greater leverage. Even when a firm cannot precommit to hedging, it will still do so. Surprisingly, hedging benefits often are greater when agency costs are low.     

Agency Cost,Dividend Policy and Growth: The Special Case of REITs

Dividend distribution enhances information transmission, and mitigates agency conflicts by restricting managers’ access to free cash flow, and exposing firms to the scrutiny and monitoring by market participants when raising external capital. The reduction in agency costs and improvement in information dissemination reduce the cost of funds, and investment at more competitive cost of capital enhances firm value. For REITs, because of the mandated high dividend distribution, growth depends on the availability of external capital at competitive rates, such that mitigation of agency costs is critical to sustain growth. We examine the relation between dividends and growth with a sample of U.S. equity REITs. Our data reveal a significantly positive relation between externally financed growth and dividend payments. The relation is stronger among REITs with more growth opportunities, and REITs that issue new equity and debt. We interpret this evidence as consistent with the notion that by reducing agency costs and facilitating capital raising, dividends enhance growth.     

Agency cost,top executives' overconfidence,and investment-cash flow sensitivity — Evidence from listed companies in China

We examine the effect of agency cost on the relation between top executives' overconfidence and investment-cash flow sensitivity using the data from Chinese listed companies. We find that on average top executives' overconfidence leads to increased investment-cash flow sensitivity. However, this relation holds only for companies with state-owned entities as controlling shareholders. In contrast, the relation is not significant for non-state controlled firms. We construct proxy for agency cost and find that state-controlled companies have significantly greater agency cost than non-state controlled companies. Results on sub-samples sorted by agency cost again show that the positive effect of top executives' overconfidence on investment-cash flow sensitivity holds only for companies that exhibit high agency cost. Our results therefore suggest that agency cost has a significant impact on the relation between top executives' overconfidence and investment-cash flow sensitivity, and the investment distortion due to top executives' overconfidence behavior may be alleviated by reducing agency cost through elevated supervision.     

Choice of Tax Regime for Superannuation Contributors

Choice of tax regime for superannuation contributors was pioneered by the United States, which offers standard 401 (k) plans and Investment Retirement Accounts (pay tax when benefits are withdrawn) alongside Roth 401(k) plans and IRAs (pay tax on employer contributions.) Australian policy is to tax employer contributions and all investment earnings. Life-cycle savers have no choice of taxation regime unless they go outside the superannuation system, notably into negative gearing. Tax-deferred superannuation accounts could make our superannuation more competitive with negative gearing. They would generate a revenue stream for the government at a time when tax revenues will be at a premium.