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 co-editor 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 www.targeted.ca. 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.
Taxes and Corporate Policies: Evidence From a Quasi Natural Experiment
This article is protected by copyright. All rights reserved
This article has been accepted for publication and undergone full peer review but has not been through the copyediting, typesetting, pagination and proofreading process which may lead to differences between this version and the Version of Record. Please cite this article as doi: 10.1111/jofi.12101.
- Accepted manuscript online: 17 SEP 2013 03:05AM EST
- Manuscript Accepted: 3 JUL 2013
- Manuscript Received: 13 JUN 2012
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 although prospective tax shields partially offset the losses, adding 4.6% to firm value. In response to changing tax incentives, firms subsequently adjusted their corporate policies. They increased leverage to gain interest tax shields and reversed changes in other policies made to capitalize on tax benefits. The evidence supports the view that taxes are important for corporate decision-making.
This article is protected by copyright. All rights reserved.