WORKING PAPERS

The Indirect Effect of Import Competition on Corporate Tax Avoidance

SSRN Working Paper 3662998
Slides

Awarded Best Research Work on International Investment and Development by UNCTAD and AIB

In preparation for submission

The role of competition in corporate tax avoidance is theoretically unclear in the existing literature. This paper empirically examines this role, with 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. However, the effect is heterogeneous across firms. The average effect is driven by multinational enterprises, and more specifically by those implanted in tax havens. In response to the China shock, these firms invested in intangible assets to escape competition, but these intangibles also allowed them to intensify their profit shifting activities. These 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 current backlash against large corporations and globalization, and the calls for reform of the international tax system.

Profit Shifting, Employee Pay, and Inequalities: Evidence from US-Listed Companies

SSRN Working Paper 3750623
Slides

In preparation for submission

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 more pronounced in companies that reward executives on an after-tax basis and in companies that are intensive in intangible assets. These new empirical findings cast light on the distributional consequences of profit shifting and the evolution of income inequalities. They also provide insights into public opinion about globalization and ongoing debates on corporate tax reforms.

Intra-Industry Diffusion of Profit Shifting Strategies

SSRN Working Paper 3796015
Slides

In preparation for submission

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

Learning the Ropes? Executive Experience and Location Choices of Multinational Firms

SSRN Working Paper 3700932

Preliminary, regularly updated

What makes firms invest in foreign countries? This paper shows that beyond country- and firm-specific characteristics, executive experience is crucial to understand multinational enterprises' location choices. Using data on US-listed firms and an event study, I find that hiring an executive having multinational experience with a given country increases the firm's probability to own subsidiaries in this country. The effect also holds at the intensive margin. Moreover, only country-specific experience is determinant, top C-level executives such as chief executive officers drive the results, and experience in managing multinational activities commands a compensation premium. A series of robustness checks corroborate these observations. Overall, the findings reveal that executives develop country-specific knowledge while working for multinationals, a valuable asset in the labor market, and significantly help companies expand abroad.

Quantifying the Effects of International Tax Reforms (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.

PRE-PHD

Revisiting the Effect of the Business Environment and Firm Capabilities on Firm Performance: Theory and Evidence from India

Master thesis available upon request

Awarded Hans Raupach Best Paper by the European Association for Comparative Economic Studies

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.