Taxes and Corporate Policies: Evidence from a Quasi Natural Experiment




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    • Craig Doidge and Alexander Dyck are with the Rotman School of Management, University of Toronto. Special thanks to Laurence Booth for many helpful comments and discussions. Warren Bailey, Susan Christoffersen, Sergei Davydenko, James Hines, Jan Jindra, Inmoo Lee, Jan Mahrt-Smith, Lukasz Pomorski, Kent Womack, the Editor Cam Harvey, the Coeditor John Graham, two anonymous referees, and an Associate Editor provided many helpful comments and suggestions, as did seminar participants at HEC Paris, Nova University Lisbon, Tilburg University, University of Mannheim, the University of Toronto, the University of Toronto Law School, the 2011 Korea American Finance Association/Korea Capital Market Institute conference, and the 2012 American Finance Association conference. We thank John Rule for providing access to institutional ownership data from Doidge thanks the Social Sciences and Humanities Research Council of Canada for financial support. Dyck thanks INSEAD for hosting him as a visiting scholar while part of this research was completed. Feng Chi, Aazam Virani, and Xiaofei Zhao provided excellent research assistance.


We document important interactions between tax incentives and corporate policies using a “quasi natural experiment” provided by a surprise announcement that imposed corporate taxes on a group of Canadian publicly traded firms. The announcement caused a dramatic decrease in value. Prospective tax shields partially offset the losses, adding 4.6% to firm value on average, and vary with the tax status of the marginal investor. Further, firms adjust leverage, payout, cash holdings, and investment in response to changing tax incentives. Overall, the event study and time series evidence supports the view that taxes are important for corporate decision making.