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 - Katz Graduate School of Business

Terry J. Shevlin

University of California-Irvine; 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. 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 - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Terry J. Shevlin

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA 92697-3125
United States
949-824-6149 (Phone)

University of California-Irvine ( email )

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

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