ABSTRACT In a broad sample of publicly traded firms, we observe that the share of firms annually reporting pre‐tax book losses increased from about 20% to 40% during 1988–2023. We also observe that 68% of those loss firms have positive cash tax payments (taxpaying loss firms). The amount of taxes paid by these loss firms is substantial and increasing over time. Surprisingly, we observe that taxes paid increase with the magnitude of pre‐tax losses. This study seeks to understand the prevalence of taxpaying loss firms. We examine whether both the extensive margin—the likelihood that a loss firm pays taxes—and the intensive margin—the magnitude of taxes paid—are explained by firm characteristics. We find that multinational status, state taxes, consolidation differences, goodwill impairments, asset write‐downs, extraordinary items, discontinued operations, depreciation differences, the frequency and magnitude of losses, and firm size are key determinants of both the likelihood and the amount of taxes paid by loss firms. We find that the decrease in the statutory tax rate included in the Tax Cuts and Jobs Act of 2017 did not decrease the tax burden on loss firms.

We hypothesize and find evidence consistent with foreign firms being tax-favored acquirers of U.S. targets with greater locked-out earnings because they can avoid the U.S. tax on repatriations. This effect is economically significant; a standard deviation increase in lockout is associated with a 12% relative increase in the likelihood that an acquirer is foreign. We also find evidence that foreign acquirers of the target firms are more likely to be residents of countries that use territorial tax systems, as the tax advantages for a foreign firm acquiring a U.S. target with locked-out earnings are even greater for these acquirers.

We examine how capital gains taxes affect investment in private start-up (i.e., pre-IPO) firms. Using data on capital raised in individual funding rounds, we estimate the effect of the 2010 SBJA, which implemented a full exemption from federal capital gains tax on the sale of qualified shares. Because of the resulting higher expected after-tax returns, we hypothesize and find evidence consistent with this capital gains tax reduction increasing the amount of investment in start-up firms per funding round by about 12%. The effect is stronger in start-up firms that are likely to have greater administrative capacity. We estimate that about one-third of the tax benefit is captured by investors.

In an integrated corporate tax system, resident shareholders receive a tax credit for corporate tax paid that can be used to offset personal tax on dividend income. Nonresident and tax-exempt (pension plan) investors cannot use the tax credit on corporate dividends and thus prefer to invest in flow-through entities. We estimate the value of the flow-through entity to nonresident and pension plan investors by examining the price change around the date of an unexpected announcement of a change in tax law related to Canadian publicly traded income trusts units creating an entity-level tax that makes them no longer tax-favored to these investors.

Abstract Current U.S. reporting and tax laws create an incentive for some U.S. firms to avoid the repatriation of foreign earnings, as the U.S. government charges additional corporate taxes on these transfers. Prior research suggests that the combined effect of these incentives leads some U.S. multinational corporations to hold a significant amount of cash overseas. In this study, we investigate the effect of cash trapped overseas on U.S. multinational corporations' foreign acquisitions. Consistent with expectations, we observe firms with high levels of trapped cash make less profitable acquisitions of foreign target firms using cash consideration (lower announcement window returns, lower buy and hold returns, decreased ROA ). The American Jobs Creation Act of 2004 (AJCA) reduced this effect by allowing firms to repatriate foreign earnings held as cash abroad at a much lower tax cost. Our study has implications for current proposals to change the tax laws related to foreign earnings.

Abstract In 2018, the European Union (EU) introduced a new mandatory reporting requirement for a wide range of cross‐border tax arrangements (EU Directive 2018/822, also known as DAC6). Unlike prior corporate transparency initiatives, which put the reporting responsibility primarily on the taxpayers, this directive puts the initial reporting responsibility on the third‐party intermediaries who are involved in the reportable arrangement at any stage during the planning and execution process. We exploit the adoption of DAC6 in the EU to examine the effectiveness of third‐party reporting in curbing cross‐border tax planning by multinationals. Using a difference‐in‐differences research design, we find that affected firms reduce income shifting and report higher effective tax rates in the post‐adoption period. The reduction in income shifting is stronger for affiliates operating in countries without legal professional privilege extensions and in countries where noncompliance penalties are higher. Our results highlight the importance of strong third‐party reporting requirements in constraining cross‐border tax planning.

ABSTRACT We develop a linear corporate tax function where taxes paid are regressed on pre-tax income and an intercept. We show that if the intercept is positive, cash ETRs are a convex function of pre-tax income. We present large-sample evidence consistent with this ETR convexity. Thus, although firms may have stable linear tax functions (i.e., constant parameters in the linear tax model) representing stable tax avoidance behavior, ETRs can change over time because of growth in pre-tax income. Consequently, simply examining changes (or differences) in cash ETRs is nondiagnostic about whether tax avoidance has changed over time (or differs across firms). We illustrate our argument by showing that all of the observed downward trend in cash ETRs documented by Dyreng et al. (2017) can be explained by growth in pre-tax income. The wholesale concern about increased tax avoidance over time might be overstated. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G39; H20; H25; H26.

Abstract We examine the role of government in the labor–creditor relationship using the case of the Chrysler bankruptcy. As a result of the government intervention, firms in more unionized industries experienced lower event-window abnormal bond returns, higher abnormal bond yields, and lower cumulative abnormal bond returns. The results are stronger for firms closer to distress. We also observe the effect in firms in which labor bargaining power is stronger and those with larger pension liabilities. Overall, the results underline the importance of government as a significant force in shaping the agency conflict between creditors and workers.

ABSTRACT A growing literature examines how a firm's behavior impacts the behavior of its peers. In this paper, we examine how changes in tax paying, and the associated financial reporting, impact a firm's peers. Changes to tax paying and reporting behavior at other firms within a peer group can be affected by many of the same factors, such as industry-level tax policy changes or audit risk, so we make use of exogenous—to the peer firms—shocks to tax behavior. Following the methodology of Dyreng, Hanlon, and Maydew (2010), we estimate managerial tax avoidance fixed effects and use these to identify tax rate shocks associated with executive turnover. We find that peer firms respond to these shocks by changing their GAAP tax rates in the same direction. The magnitude of the effect corresponds to an approximately 10 percent response to the average change in peer group GAAP ETR. Our evidence suggests that these peer effects occur only for book (i.e., financial reporting), rather than cash (i.e., real effects), ETR and are concentrated in firms with potentially greater discretion in reporting taxes on foreign earnings. JEL Classifications: H25; M41. Data Availability: Data used in this study are available from public sources identified in the paper.

ABSTRACT We investigate the association between financial constraints and cash savings generated through tax planning. We predict that an increase in financial constraints leads firms to increase internally generated funds via tax planning. We measure financial constraints based on changes in firm-specific and macroeconomic measures. We find that firms facing increases in financial constraints exhibit increases in cash tax planning. Our results indicate that among profitable firms, firm-years with the largest increases in firm-specific constraints are associated with declines in firms' cash effective tax rates ranging from 3.00 to 5.14 percent, which equate to between 2.87 and 4.82 percent of operating cash flows. We also find that (1) the impact of financial constraints on tax planning is greatest among firms with low cash reserves, and (2) constrained firms achieve a substantial portion of their current tax savings via deferral-based tax planning strategies, despite the lack of a financial statement benefit. JEL Classifications: E69; H25; H60. Data Availability: Data used in this study are available from public sources identified in the paper.