Corporate Taxes and the Growth of the Firm

KOF Working Paper No. 354

78 Pages Posted: 4 Mar 2014

See all articles by Federica Liberini

Federica Liberini

ETH Zürich - KOF Swiss Economic Institute

Date Written: February 28, 2014

Abstract

It is desirable to reduce the number of "artificial" merger and acquisitions (MA) designed to escape from high tax jurisdictions, without discouraging domestic firms from growing into highly productive multinational corporations. This paper studies the effect of corporate taxes on the headquarter's decision to expand its extensive margins through the acquisition of pre-existing firms. A model for the investment behaviour of heterogeneous firms is built, and Corporate taxes are introduced. The model shows that higher home statutory corporate tax rates make exports relatively more expensive, making firms more likely to serve foreign demand through cross-border acquisitions. The model's predictions are tested on a dynamic random parameter probit model estimated on firm-level data. The model's predictions are confirmed by the results from the empirical investigation. The data also support the hypothesis that there are sunk costs associated with becoming a multinational corporation, and that domestic firm that overcome these costs and acquire their first foreign subsidiary are more likely to complete further acquisitions. In addition, the inability to shift profit to foreign locations makes domestic firms more sensitive to home corporate taxes, as their capacity to capture investment opportunity is negatively affected by a reduction in net tax profit.

Keywords: Corporate Taxation, Merger and Acquisitions, Dynamic Probit Model

JEL Classification: C25, G34, H25, H32

Suggested Citation

Liberini, Federica, Corporate Taxes and the Growth of the Firm (February 28, 2014). KOF Working Paper No. 354, Available at SSRN: https://ssrn.com/abstract=2404282 or http://dx.doi.org/10.2139/ssrn.2404282

Federica Liberini (Contact Author)

ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

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