The Indirect Effect of Import Competition on Corporate Tax Avoidance
SSRN Working Paper 3662998
Award: Best Research Work on International Investment and Development from the United Nations (UNCTAD) and the Academy of International Business (AIB)
The role of competition in corporate tax avoidance is theoretically unclear in the literature. This paper clarifies this role with an empirical study and a focus on import competition. I exploit financial statements to measure tax avoidance of US-listed firms and the conferral of Permanent Normal Trade Relations status on China as a quasi-natural experiment to establish causality. The results reveal that import competition fosters corporate tax avoidance. Furthermore, the average effect is driven by multinational enterprises implanted in tax havens. They invested in intangible assets to escape competition pressures, but these intangibles also allowed them to intensify their profit shifting activities. The findings shed light on the determinants of corporate tax avoidance. More generally, they help understand the decline in the average effective tax rate of US-listed firms, the ongoing backlash against large corporations and globalization, and the recent calls for reform of the international tax system.
Profit Shifting, Employee Pay, and Inequalities: Evidence from US-Listed Companies
SSRN Working Paper 3750623
Corporate tax avoidance has become a salient policy issue and has regularly been accused of aggravating income inequalities. However, systematic evidence on this topic remains lacking. I empirically explore in this paper the effect of profit shifting activities of multinational enterprises on employee pay. Using a rich database on executives, foreign subsidiaries, and financial statements of US-listed companies, I find that this effect substantially varies across occupations. On the one hand, chief executive officers and chief financial officers receive higher compensations when their firm enters tax havens. On the other hand, non-executive employees, if anything, see their wages fall. Furthermore, the inequality-deepening effect of profit shifting is driven by companies that reward executives on an after-tax basis and more pronounced in companies that are intensive in intangible assets. These new empirical findings cast light on the distributional consequences of profit shifting, the evolution of income inequalities, public opinion about globalization, and ongoing debates on corporate tax reforms.
Learning the Ropes? Executive Experience and Location Choices of Multinational Firms
SSRN Working Paper 3700932
What makes firms invest in foreign countries? This paper argues that executives' experience contributes to location decisions of multinational enterprises. Through an event study, I show that hiring an executive used to oversee multinational operations with a given country enables the firm to scale up its activities in this country. Moreover, only country-specific experience of C-level executives is determinant and experience in managing multinational activities yields a compensation premium. A series of robustness checks corroborate the findings and four alternative identification strategies based on instrumental variables, trade policy reforms, and plausibly exogenous shocks like executive deaths support a causal interpretation of the results. In line with anecdotal evidence, the paper thus demonstrates that top executives develop valuable country-specific knowledge while working for multinationals and significantly help the latter expand abroad. It also draws policy conclusions, in particular for tax havens and profit shifting.
Intra-Industry Diffusion of Profit Shifting Strategies
SSRN Working Paper 3796015
Does tax knowledge spread across firms? This paper provides systematic evidence along these lines using data on US-listed firms' presence in tax havens and an event study. An enterprise is more likely to own a subsidiary in a specific tax haven once another enterprise operating in the same sector enters this tax haven. The inclusion of three-way fixed effects, the absence of pre-trends, and several robustness checks consolidate the results. Moreover, profit shifting spillovers vary over time, across sectors, and by tax haven. The findings suggest that firms replicate the tax avoidance schemes of their peers and carry policy implications.
WORK IN PROGRESS
Quantifying Profit Shifting (with S. Laffitte, M. Parenti, and F. Toubal)
Working paper coming soon
Multinational enterprises exploit legal technicalities to avoid taxes and shift profits to low- or no-tax jurisdictions. These activities affect firms' location decisions and countries' tax revenues and attractiveness. In this paper, we develop a flexible and parsimonious quantitative general equilibrium model of multinational activity embedding corporate taxation and profit shifting. Firms may change their location and profit shifting decisions after a reform, unlike in existing models. Also, we introduce two different tax elasticities for real activity and profit shifting. The model guides the calibration of bilateral profit shifting for which we provide a new methodology. It allows us to simulate the impact of various reforms of the international tax system. We simulate various tax reforms aimed at curbing tax-dodging practices of multinationals. We predict their effect on many outcomes, such as countries' tax revenues and relative attractiveness. We further highlight the real effects of these reforms, as well as their impact on profit shifting and its allocation across tax havens.
Revisiting the Effect of the Business Environment and Firm Capabilities on Firm Performance: Theory and Evidence from India
Master thesis available upon request
Awards: Hans Raupach Best Paper from the European Association for Comparative Economic Studies (EACES) & Finalist of the New Economic Talent Award from the Center for Economic Research and Graduate Education (CERGE-EI)
Are firms with low capabilities in favorable environments as successful as firms with high capabilities in bad environments? I uncover new stylized facts on the business environment, firm capabilities, and firm performance. Then, I develop a theoretical model which rationalizes them, allows the business environment and firm capabilities to each affect innovation and exports, and guides the econometric exercise. The results reveal that firm capabilities directly spur only innovation, while the business environment directly drives only exports. They imply that policies aimed to boost firm performance should strengthen both the business environment and firm capabilities to maximize their success.