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Corporate Finance, Taxation and Economic Performance

Applicant Keuschnigg Christian
Number 129556
Funding scheme Project funding (Div. I-III)
Research institution Forschungsgemeinschaft für Nationalökonomie (FGN-HSG) Universität St.Gallen
Institution of higher education University of St.Gallen - SG
Main discipline Economics
Start/End 01.05.2010 - 30.06.2013
Approved amount 212'471.00
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Keywords (5)

corporate finance; corporate governance; corporate taxation; public policy; economic performance

Lay Summary (English)

Lead
Lay summary
Difficulties in attracting external financing is a main constraint on investment of existing firms and the creation of new firms. However, finance constraints do not affect all firms equally. New innovative firms often have little own funds but large, profitable investment opportunities. These firms are most likely to be finance constrained. Large and mature com-panies, in contrast, tend to have lots of existing assets for collateral and may have already exhausted their investment needs. They are unlikely to be finance constrained but may suffer from other governance problems, such as empire building and misuse of corporate funds. As documented in a large body of empirical literature, different segments of the business sector are thus affected by financial frictions in different ways. Business taxation will therefore have different consequences for the financing and investment of different types of firms.

With few exceptions, existing literature in public economics has incorporated neither the theory of heterogeneous firms nor the modern theory of corporate finance. It is a unique re-search opportunity to merge heterogeneous firm theory and corporate finance to study public policy in market equilibrium. The project pursues five research questions which all make use of corporate finance theory. (i) What are the determinants of the firms' choices of legal form (corporate vs. non-corporate status)? Should the tax system discriminate among corporate and non-corporate firms? (ii) What are the differential effects of taxes on investment of financially constrained and unconstrained firms? Since these two types of firms systematically differ in their factor productivity and investment prospects, the effect of taxes on the composition of firms becomes important. (iii) What is the role of dividend taxation in the presence of firm heterogeneity? Constrained firms use all available own funds to finance investment, do not pay dividends and earn an excess return. In contrast, large mature firms with free cash-flow often prefer internal investments even if the return is below average, instead of paying out funds that could be more profitably invested elsewhere. In determining pay-out behavior, div-idend taxation should affect the efficiency of capital allocation and aggregate investment. (iv) What is the effect of labor taxation and job protection on investment of constrained firms, and how does this affect aggregate unemployment? (v) How do institutional quality and financial market development affect a country's comparative advantage in innovative sectors?

Direct link to Lay Summary Last update: 21.02.2013

Responsible applicant and co-applicants

Employees

Publications

Publication
The arm's length principle and distortions to multinational firm organization
Keuschnigg Christian, Devreux Michael (2013), The arm's length principle and distortions to multinational firm organization, in Journal of International Economics, 89, 432-440.
Corporate taxation, debt financing and foreign-plant ownership
Keuschnigg Christian, Egger Peter, Eggert Wolfgang, Winner Hannes (2010), Corporate taxation, debt financing and foreign-plant ownership, in European Economic Review, 54, 94-107.
Public Policy, Venture Capital and Entrepreneurial Finance
Keuschnigg Christian (2010), Public Policy, Venture Capital and Entrepreneurial Finance, in Douglas Cumming (ed.), John Wiley & Sons, NJ, USA, 525-552.
Business Taxation, Corporate Finance and Economic Performance
Keuschnigg Christian, Ribi Evelyn, Business Taxation, Corporate Finance and Economic Performance, in Douglas Cumming (ed.), Oxford University Press, Oxford.
Profit Taxation and Finance Constraints
Keuschnigg Christian, Ribi Evelyn, Profit Taxation and Finance Constraints, in International Tax and Public Finance.
Profit taxes and financing constraints
Keuschnigg Christian, Ribi Evelyn, Profit taxes and financing constraints, in International Tax Public Finance.

Collaboration

Group / person Country
Types of collaboration
Prof. Dr. Peter Egger, ETH Zürich Switzerland (Europe)
- in-depth/constructive exchanges on approaches, methods or results
- Publication
Prof. Dr. Hannes Winner, University of Salzburg Austria (Europe)
- in-depth/constructive exchanges on approaches, methods or results
- Publication
Prof. Dr. Michael Devereux, Oxford University Centre for Business Taxation Great Britain and Northern Ireland (Europe)
- in-depth/constructive exchanges on approaches, methods or results
- Publication

Scientific events

Active participation

Title Type of contribution Title of article or contribution Date Place Persons involved
SFB 884 Seminar Series, University of Mannheim Individual talk Innovation, Trade and Finance 12.03.2012 Mannheim, Germany, Germany Keuschnigg Christian;
Research Seminar International Economics, University of Tübingen Individual talk Corporate Taxes, Internal Borrowing, and the Lending Capacity Within Multinational Firms 22.11.2011 Tübingen, Germany, Germany Keuschnigg Christian;
Research Seminar Accounting and Taxation, University of Mannheim Individual talk Taxation and Incorporation, Research Seminar Accounting and Taxation 28.09.2011 Mannheim, Germany, Germany Keuschnigg Christian;
Annual Meeting of the German Economic Association Talk given at a conference Taxation and Incorporation 05.09.2011 Frankfurt, Germany, Germany Keuschnigg Christian;
Annual Congress of the European Economic Association Talk given at a conference Innovation, Trade and Finance 27.08.2011 Oslo, Norway Keuschnigg Christian;
Centre for Macroeconomic Research, University of Cologne Individual talk Innovation, Trade and Finance 06.07.2011 Köln, Germany Keuschnigg Christian;
Research Seminar, University of Salzburg Individual talk Corporate Taxes, Internal Borrowing, and the Lending Capacity Within Multinational Firms, 24.04.2011 Salzburg, Austria Keuschnigg Christian;
Institute for Advanced Studies,Vienna Joint Macroeconomics Seminar Individual talk Innovation, Trade and Finance 07.04.2011 Wien, Austria Keuschnigg Christian;
IMF Technical Workshop on Tax-Induced Debt Bias Talk given at a conference Taxation and Debt Bias - Theory, Discussion of paper by Roger Gordon 04.03.2011 Washington D.C., United States of America Keuschnigg Christian;
GEP, ifo, Murphy Institute Conference on Finance and Trade Talk given at a conference Innovation, Trade and Finance 24.02.2011 Nottingham, Great Britain and Northern Ireland Keuschnigg Christian;
Max-Planck-Institut für Steuerrecht und Öffentliche Finanzen Individual talk Besteuerung und Rechtsformwahl (Taxation and Incorporation) 15.02.2011 München, Germany Keuschnigg Christian;
CESifo Area Conference on Global Economy Talk given at a conference Innovation, Trade and Finance 11.02.2011 Munich, Germany Keuschnigg Christian;
Workshop "Corporate Finance and Economic Performance", University of St. Gallen, CEPR, ETH Zürich and INSEAD Talk given at a conference Profit Taxation, Innovation and the Financing of Heterogeneous Firms 17.12.2010 St. Gallen, Switzerland Keuschnigg Christian;
Research Seminar, University of Innsbruck Individual talk Profit Taxation, Innovation and the Financing of Heterogeneous Firms 20.10.2010 Innsbruck, Austria Keuschnigg Christian;
Brownbag Research Seminar, University of St. Gallen Individual talk Innovation, Trade and Finance 22.09.2010 St. Gallen, Switzerland Keuschnigg Christian;
Annual Meeting of the German Economic Association Talk given at a conference Innovation, Trade and Finance 09.09.2010 Kiel, Germany Keuschnigg Christian;
37th Annual Meeting of the European Finance Association Talk given at a conference Profit Taxation, Innovation and the Financing of Heterogeneous Firms 27.08.2010 Frankfurt, Germany Keuschnigg Christian;
66th Congress of the International Institute of Public Finance Talk given at a conference Profit Taxation, Innovation and the Financing of Heterogeneous Firms 23.08.2010 Uppsala, Sweden Ribi Evelyn;
Annual Symposium 2010, Oxford University Centre for Business Taxation Talk given at a conference Profit Taxation, Innovation and the Financing of Heterogeneous Firms 30.06.2010 Oxford, Great Britain and Northern Ireland Keuschnigg Christian;
Annual Congress of Swiss Society of Economics and Statistics Individual talk Profit Taxation, Innovation and the Financing of Heterogeneous Firms 25.06.2010 Fribourg, Switzerland Keuschnigg Christian;
Journées d'Economie Publique Louis-André Gérard-Varet Talk given at a conference Profit Taxation, Innovation and the Financing of Heterogeneous Firms 21.06.2010 Marseille, France Keuschnigg Christian;


Self-organised

Title Date Place
CEPR Public Policy Symposium 2011 27.05.2011 Zürich, Switzerland, Switzerland

Knowledge transfer events



Self-organised

Title Date Place

Communication with the public

Communication Title Media Place Year
New media (web, blogs, podcasts, news feeds etc.) Diverse Themen zur Unternehmensbesteuerung Wirtschaftspolitisches Zentrum International 2016

Associated projects

Number Title Start Funding scheme
146685 Taxation, Banking, and Sovereign Risk 01.04.2013 Project funding (Div. I-III)
133876 Corporate finance and economic performance 01.12.2010 Scientific Conferences

Abstract

Lack of own capital and the difficulty of attracting external financing is a main constraint on expansion investment of existing firms and the creation of new firms. However, finance constraints do not affect all firms equally. New firms and innovative growth companies often have little own funds but large, profitable investment opportunities. The success of these firms typically depends on the managerial effort of a few inside owners. To assure incentives, they must keep a large enough part of the prospective profits, leaving only a limited amount of pledgeable income that is available for repayment of external funds. These firms are thus the most likely to be financially constrained. Large and mature companies, in contrast, tend to have lots of existing assets for collateral and may have already exhausted their growth prospects and investment needs. They are unlikely to be finance constrained but may suffer from other governance problems, such as empire building and misuse of corporate funds. As documented in a large body of empirical literature, different segments of the business sector are thus affected by finance constraints in different ways. Business taxation will therefore have different consequences for the financing and investment of different types of firms, depending on the specific financial regime of firms.Firms are heterogeneous in other dimensions as well. Most importantly, firms are distributed according to their factor productivity which induces investment opportunities and firm size. A firm's factor productivity is itself a result of earlier innovation and startup investment. The stylized empirical fact is that the productivity distribution is characterized by many firms with low productivity and little growth prospects and few firms with high productivity and large growth prospects. This theory of heterogeneous firms has recently spurred a large new literature in trade theory to explain how firms of different size and productivity select into alternative organizational forms (purely national, exporting, outsourcing and foreign direct invest-ment). This new theory helps to explain how trade affects the composition of firms with different organizational form and how trade induced firm selection determines aggregate factor productivity and economic performance. This theory has spurred a large wave of empirical research to test the predictions. However, this literature has so far almost entirely abstracted from any financing problems. The relation between factor productivity and investment opportunities is bound to create financing frictions which introduces new determinants of trade patterns that relate to a firm's financing capacity: corporate governance institutions, investor protection, accounting standards and other measures of corporate transparency etc. With very few exceptions, existing literature in public economics has so far incorporated neither the theory of heterogeneous firms nor the modern theory of corporate finance. The unique research opportunity in this project is in the combination of heterogeneous firm theory, corporate finance and public policy in market equilibrium. In particular, the project pursues five research questions which all make use of corporate finance theory. (i) What are the determinants of the firms' choices of legal form (corporate vs. non-corporate status)? How do taxes affect corporate and non-corporate firms, how does this change the composition of the business sector, and what are the implications for economic performance? Should the tax system discriminate among corporate and non-corporate firms? (ii) What are the differential effects of taxes on investment of financially constrained and unconstrained firms? Since these two types of firms also differ in a systematic way in their factor productivity and investment prospects, the effect of taxes on the composition of the business sector becomes important. In other words, one must distinguish between intensive investment per firm and extensive investment via entry and self-selection into two alternative investment regimes. (iii) What is the role of dividend taxation in the presence of firm heterogeneity? Since constrained firms must use all available own funds to finance investment, they do not pay dividends. Unconstrained firms distribute free cash-flow at least partly as dividends rather than using it to self-finance (unconstrained) investment. Again, dividend taxation should have a differential impact on these two types of firms and affect aggregate investment along the intensive and extensive margins as, in fact, new empirical research seems to suggest. (iv) What is the effect of labor taxation and job protection on the financing capacity and investment prospects of constrained firms, and how does this affect aggregate unemployment? If labor taxes and replacement incomes are shifted to firms by raising wages, it should erode the financing capacity of firms and their ability to invest and create new jobs. (v) How do the quality of corporate governance institutions and financial market development affect a country's comparative advantage and interna-tional competitiveness? These factors can influence a country's attractiveness for location choice when firms need to raise substantial outside funds to finance investment.The research will clarify the efficiency of the market equilibrium, analyze the effects of taxes, subsidies and public policy more generally, when at least part of the firms are finance constrained, and will derive appropriate policy conclusions. The research project is mainly theoretical but is also concerned to empirically test important predictions in joint research with econometricians.
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