Tax policy endogeneity: evidence from R&D tax credits

This paper estimates the causal effect of research and development (R&D) tax incentives on R&D expenditures using new data on U.S. states. Identifying tax variation comes from changes in federal corporate tax laws that heterogeneously and, due to the simultaneity of state and federal corporate taxes, automatically affect state-level tax laws. Instrumental variables regressions indicate that a 1% increase in R&D tax incentives causes a statistically significant 2.8–3.8% increase in R&D. Alternatively, ordinary least squares (OLS) regressions of R&D expenditures on R&D tax incentives, which do not correct for the policy endogeneity of R&D tax incentives, indicate that a 1% increase in R&D tax incentives causes a statistically insignificant 0.4–0.7% increase in R&D. One possible explanation for these results is that tax policies are implemented before an economic downturn.     

R&D financing and growth

ABSTRACT

R&D investment are an important engine of growth and development. Yet economists have often claimed underinvestment, based on the consideration that these projects are more costly to finance, especially, due to the asymmetric information between inside and outside investors. Coherently, a recent empirical evidence has shown that firms intensively active in R&D are less leveraged and rely more heavily on internal finance. Motivated by this evidence, we study the effects of asymmetric information and financial frictions within a GE economy of Schumpeterian tradition. The model and equilibrium concept are rich enough to represent investment and innovation decisions, technology adoption/diffusion through patent licensing and, most importantly, firms' financial decisions. In this representation, R&D-intensive firms might effectively rely more on internal sources and equity than on debt financing, relative to what would happen in frictionless markets. Further, financial decisions affect aggregate investment and income dynamics.     

The impact of public R&D expenditure on business R&D*

This paper attempts to quantify the aggregate net effect of government funding on business R&D in 17 OECD Member countries over the past two decades. Grants, procurement, tax incentives and direct performance of research (in public laboratories or universities) are the major policy tools in the field. The major results of the study are the following: Direct government funding of R&D performed by firms has a positive effect on business financed R&D (except if the funding is targeted towards defence activities). Tax incentives have an immediate and positive effect on business-financed R&D; Direct funding as well as tax incentives are more effective when they are stable over time: firms do not invest in additional R&D if they are uncertain of the durability of the government support; Direct government funding and R&D tax incentives are substitutes: increased intensity of one reduces the effect of the other on business R&D; The stimulating effect of government funding varies with respect to its generosity: it increases up to a certain threshold (about 10% of business R&D) and then decreases beyond; Defence research performed in public laboratories and universities crowds out private R&D; Civilian public research is neutral for business R&D. * We thank the participants to various seminars, including the OECD Committee for Scientific and Technology Policy and the NBER 2000 Summer Institute on Productivity for helpful comments and suggestions. All opinions expressed in this article are those of the authors and do not reflect necessarily the views of the OECD or Université Libre de Bruxelles.     

R&D investment,cash holdings and the financial crisis: evidence from Korean corporate data

This article examines the real effects of the financial crisis in 2008 on corporate R&D investment by analyzing firm-level panel data from 2005 to 2011 obtained from KIS-VALUE, a Korean corporate finance database. I estimate a dynamic panel model of R&D investment that includes an after-crisis dummy to reflect the effects of the external finance supply shock after the financial crisis, an interaction term of the dummy and cash holdings to measure the marginal effect of cash holdings after the crisis, investment opportunities (sales and the q ratio) and financial positions as the debt-equity ratio. The estimation implies a negative yet relatively small impact of the credit supply shock from the financial crisis on R&D investment and the mitigation of the negative impacts by cash holdings after the onset of the financial crisis, whereas the data show decreasing R&D investment and sales for the whole period. Based on the data and the estimation, I find that firms were able to lessen the pressure from diminishing market demand before the crisis using external finance, but they had to use internal financial sources after the crisis smooth R&D investment.     

Why is the corporate tax rate lower than the personal tax rate?: The role of new firms

In many OECD countries, statutory corporate tax rates are lower than personal income tax rates. This tax rate difference is often particularly large for small firms. The present paper argues that a reduction of the corporate tax rate below the personal tax rate is an optimal tax policy if there are problems of asymmetric information between investors and firms in the capital market. The reduction of the corporate tax rate below the personal tax rate encourages equity financing and thus mitigates the excessive use of debt financing induced by asymmetric information. Our main theoretical result stands in marked contrast to the traditional view of corporate taxation and corporate finance theory, according to which there is a tax disadvantage to equity financing. More recent empirical evidence on this issue, however, is in line with our result.     

税收优惠与企业创新绩效 ——基于研发投入和非研发创新投入的双重中介效应

税收优惠政策对企业创新绩效的影响广受关注,其传导机制更是一个有待深入探讨的问题。基于2000-2015年全国规模以上工业企业的省级面板数据,采用中介效应分析方法,研究税收优惠对企业创新绩效的影响,并运用面板门槛模型对两者之间的非线性关系进行探讨。结果表明:税收优惠一方面可以直接对创新绩效产生正向推动作用,另一方面可以通过研发投入和非研发创新投入发挥部分中介效应,间接提高企业的创新绩效,中介效应值为39.5%,且两者还存在着正向的协同效应。同时这种内在的传导机制存在着区域异质性:对于东部沿海地区而言,研发投入和非研发创新投入同时发挥中介效应;但是对于中西部地区而言,非研发创新投入的中介效应不显著。而且税收优惠对企业创新绩效的促进效果并非一成不变,而是随着研发投入和非研发创新投入的逐渐增加呈递增态势。因此,进一步地加大税收优惠力度的同时,合理规划自主研发和外源技术的资金安排,有利于实现企业创新绩效的最大化。     

Quantitative growth effects of subsidies in a search theoretic R&D model

Should government subsidize R&D and does it matter how these subsidies are allocated? We examine these questions in a dynamic model where R&D is described as sequential sampling from a distribution of new ideas. Successful discoveries affect future available resources and incentives for further R&D. Consequently, there may be under-investment in R&D. We study the effect of government interventions aimed at fostering growth through R&D. Calibrating the model with aggregate data from the Israeli business sector allows us to quantitatively compare two forms of support resembling those actually used to encourage R&D in the Israeli business sector: (i) an unrestricted subsidy that may be used at the recipients' discretion to finance R&D or other investments, (ii) a subsidy earmarked by the government for R&D activities only. While there is no theoretical way to determine which of the two subsidies will have a greater impact on search for new ideas and growth, we find that in the calibrated economy both subsidies have a significant but similar impact on the economy's output and TFP growth rates. Accordingly, in the case of the Israeli business sector, the incentives to conduct R&D were sufficiently strong, and no R&D-specific encouragement was needed. However, a sensitivity analysis reveals that for economies characterized by other parameter values this result may not be true. Correspondence to: B. Bental     

Does issuing equity help R&D activity? Evidence from unlisted Italian high-tech manufacturing firms

This paper evaluates the causal effect of issuing equities on the probability that a firm engages in R&D activity. Equity is a better source of external finance than debt for innovation. It does not require collateral, does not exacerbate moral hazard problems connected with the substitution of high-risk for low-risk projects, quite common when using debt, and, unlike debt, does not increase the probability of bankruptcy; equity also allows investors to reap the entire benefit of the returns of successful innovative projects. This paper focuses on high-tech firms for which asymmetric information problems are more pervasive. Implementing an instrumental variable estimation, we find that issuing equity increases the probability that the firm has R&D expenditures by 30–40%. We detect considerable heterogeneity in this effect: the impact of issuing equity is significant only for small, young and more highly leveraged high-tech firms. We also find interesting evidence that issuing equity increases R&D expenditures in relation to sales.     

On the impact of public policies and wage formation on business investment in research and development

Against the backdrop of mediocre growth prospects in many countries, governments should do more to promote private investment in research and development (R&D). Public fiscal policies and the characteristics of wage formation are key as they affect both the incentives that firms face and their resources. This paper studies their impact at the macro level in a panel of 14 OECD countries since 1981, while we also account for the impact of unobserved common factors like the world level of knowledge. Tax incentives, government intramural expenditures on R&D, public R&D subsidies (if they are not too low nor too high) and especially investment in tertiary education, encourage business R&D investment. Wage moderation may also contribute to innovation, but only in fairly closed economies and in economies with flexible labour markets. In highly open economies with rigid labour markets, high wage pressure promotes investment in R&D. Innovation may then be the only competitive strategy for firms.     

R&D subsidies and private R&D expenditures: evidence from Italian manufacturing data

This paper uses a comprehensive firm level data set for the manufacturing sector in Italy to investigate the effect of government support on privately financed R&D expenditure. Estimates from a non‐parametric matching procedure suggest that public assistance has a positive effect on private R&D investment in the sense that the recipient firms achieve more private R&D than they would have without public support. This indicates that the possibility of perfect crowding out between private and public funds can be rejected. Furthermore, in this sample of Italian firms, tax incentives appear to be more effective than direct grants. The paper also examines whether public funding affects the financial sources available for R&D and finds that grants encourage the use of internal sources. The results also show some evidence of positive effects on credit financing for R&D.     

Government debt and private leverage: An extension of the Miller theorem

This paper shows how government financing decisions can influence the corporate decision to use debt or equity finance. In particular, it is shown that an increase in the stock of taxable government debt reduces the equilibrium quantity of corporate debt, and that an increase in the stock of tax-free government debt reduces the equilibrium quantity of corporate equity. The effects of inflation rate and tax rate changes are also considered.     

How effective are level-based R&D tax credits? Evidence from the Netherlands

This article examines the impact of the R&D fiscal incentive programme on R&D by Dutch firms. Taking a factor demand approach, we measure the elasticity of firm R&D capital accumulation to its user cost. Econometric models are estimated using a rich unbalanced panel of firm data covering the period 1996 to 2004 with firm specific R&D user costs varying with tax incentives. Using the estimated user cost elasticity, we perform a cost–benefit analysis of the R&D incentive programme. We find some evidence of additionality suggesting that the level based programme of R&D incentives in the Netherlands is effective in stimulating firms’ investment in R&D. However, the hypothesis of crowding out can be rejected only for small firms. The analysis also indicates that the level based nature of the fiscal incentive scheme leads to a substantial social deadweight loss.     

The impact of corporate debt on long term investment and firm performance

Prior research indicates a linkage between debt, research and development (R&D) and physical investment, and that the relationship varies depending on the type of firm (science versus non–science). Leverage also plays a multidimensional role in corporate performance and growth. The relationship between financial leverage and R&D expenditure is analysed using a sample of large United States (US) manufacturing firms. Then, the impact of leverage on R&D expenditure is studied using corporate performance drivers as intermediate variables. The results indicate that there is a strong negative relationship between the degree of financial leverage and the level of R&D expenditure that firms undertake. The negative relationship is robust to changes in model specifications and sample periods. More importantly, the results show that it is higher leverage that leads to lower R&D expense rather than R&D causing variations in future leverage. In addition, the results indicate that higher leverage adversely influences future investment in R&D which may in turn lead to negative impact on long term operating performance and future growth opportunities.     

Portfolio Implications of an Equity Rain in Australia*

In the next decade Australia will experience a substantial privatization program. This represents a switch away from public debt financing towards public equity financing. In this paper, estimates of the likely effect of the government's privatization program on corporate financing are provided. The main result of an increase in the supply of equities along with a commensurate reduction in the supply of government debt is to cause a significant increase in the relative cost of equity, thereby creating incentives for corporate financiers to emphasize reliance on debt financing relative to equity financing. The estimated effect on the weighted cost of finance in the economy, while positive, is small     

The interplay between target firm R&D,acquirer debt financing and takeover premia

The level of acquisition premia is of paramount importance in light of the vast sums paid to target shareholders and the often disappointing returns realized by corporate buyers. In this letter, we focus on the impact of R&D investments by targets on the acquisition premium contingent upon the acquirer’s financing choices. Based on a unique hand-collected sample of 407 listed European transactions, we find a positive effect of target R&D on premia paid. Yet, when acquirers finance the acquisition of an R&D intensive target with debt, the positive relation disappears. Consequently, we establish that financing sources affect bidding strategies of acquiring companies in case of difficult-to-value targets.     

不同监督情境下政府创新支持对企业研发投入的影响——基于农业上市公司的实证研究

近年来,“三农”问题受到极大关注。为了应对外部资源、环境、科学技术等多重压力对农业升级与发展的影响,政府出台了诸多政策支持农业企业的技术研发与创新。本文从政府干预视角分析政府补助和税费返还两种形式的政府创新支持政策对农业企业研发投入的影响,重点分析机构投资者与大股东参与公司内部治理以及社会审计事务机构参与公司外部治理这两者所发挥的不同监督作用。研究发现：第一,不同形式的政府创新支持（政府补助和税费返还）对农业企业研发投入的影响并不一致。政府补助产生替代效应,税费返还则产生互补效应。第二,持股监督（机构投资者和大股东的持股比例上升）能增强政府补助对农业企业研发投入的替代效应,也能增强税费返还对农业企业研发投入的互补效应。第三,审计监督（社会审计事务机构的审计意见）会减弱政府补助支持对农业企业研发投入的替代效应,也会减弱税费返还对农业企业研发投入的互补效应。本文的研究发现为政府制定适宜的创新支持政策,以及合理发挥持股监督与审计监督的内外部治理作用,提供一定的决策依据和理论支持。     

Timing and Commitment of Environmental Policy,Adoption of New Technology,and Repercussions on R&;D

We investigate the interplay between environmental policy, incentives to adoptnew technology, and repercussions on R&D. We study a model where a monopolistic upstream firm engages in R&D and sells advanced abatement technology to polluting downstream firms. We consider four different timing and commitment regimes of environmental tax and permit policies: ex post taxation (or issuing permits), interim commitment to a tax rate (a quota of permits) after observing R&D success but before adoption, and finally two types of ex antecommitment before R&D activity, one with a unique tax rate (quota of permits), the other one with a menu of tax rates (permit quotas). We study the second best tax and permit policies and rank these with respect to welfare. In particular, we find that commitment to a menu of tax rate dominates all other policy regimes.     

IS CORPORATE R&D INVESTMENT IN HIGH‐TECH SECTORS MORE EFFECTIVE?

This paper discusses the link between R&D and productivity across the European industrial and service sectors. The empirical analysis is based on both the European sectoral OECD data and on a unique micro‐longitudinal database consisting of 532 top European R&D investors. The main conclusions are as follows. First, the R&D stock has a significant positive impact on labor productivity; this general result is largely consistent with previous literature in terms of the sign, the significance, and the magnitude of the estimated coefficients. More interestingly, both at sectoral and firm levels the R&D coefficient increases monotonically (both in significance and magnitude) when we move from the low‐tech to the medium‐ and high‐tech sectors. This outcome means that corporate R&D investment is more effective in the high‐tech sectors and this may need to be taken into account when designing policy instruments (subsidies, fiscal incentives, etc.) in support of private R&D. However, R&D investment is not the sole source of productivity gains; technological change embodied in gross investment is of comparable importance on aggregate and is the main determinant of productivity increase in the low‐tech sectors. Hence, an economic policy aiming to increase productivity in the low‐tech sectors should support overall capital formation.     

Investment under Uncertainty, Debt and Taxes

It is common practice in financial derivative valuation to use a discount factor based on the riskless debt rate. But, to what extent is this discount factor appropriate for cash flows emerging in capital budgeting? To answer this question, we introduce a framework for real asset valuation that considers both personal and corporate taxation. We first discuss broad circumstances under which personal taxes do not affect valuation. We show that the appropriate discount rate for equity‐financed flows in a risk‐neutral setting is an equity rate that differs from the riskless debt rate by a tax wedge due to the presence of personal taxation. We extend this result to the valuation of the interest tax shield for exogenous debt policy with default risk. Interest tax shields, which accrue at a net rate corresponding to the difference between the corporate tax rate and a tax rate related to the personal tax rates, can have either positive or negative values. We also provide an illustrative real options application of our valuation approach to the case of an option to delay investment in a project, showing that the application of Black and Scholes formula may be incorrect in presence of personal taxes.     

A cost‐benefit analysis of R&D tax incentives

Abstract.  Although technical knowledge generates spillover benefits, production of technical knowledge creates congestion externalities; thus, private R&D investment could be inefficient. A computable general equilibrium model is used to rank tax incentives by their effects on research effort and measure welfare effects. Five results stand out: R&D tax credits produce relatively large increases in research effort and welfare. Lower corporate income tax rates and ITCs for downstream users of high‐tech production inputs rank second. Revenue losses from lower personal income tax rates can produce welfare losses. Ironically, ITCs for upstream producers of innovative inputs are ineffective. Incremental R&D credits dominate comprehensive credits. JEL Classification: E62, H21, O38