Competitive Externalities of Tax Cuts

Michael P. Donohoe, Hansol Jang, Petro Lisowsky

Research output: Contribution to journalArticlepeer-review


We examine how tax cuts that benefit some firms are related to the economic performance of their direct competitors. Consistent with tax cuts decreasing the cost of initiating competitive strategies, we find that a decrease in the tax burden for only a specific group of firms in the U.S. economy (i.e., “rivals”) has a negative economic effect on the performance of its direct competitors not directly exposed to the same tax cut (i.e., “competitors”). This negative externality is stronger when the relatively higher taxed competitors (1) are financially constrained, (2) operate in more competitive markets, (3) have similar products to their lower taxed rivals, (4) face rivals that retain more of their cash tax savings due to lower dividends and share repurchases, and (5) face lower taxed, but financially constrained, rivals. We also find that shareholders and lenders price the negative externality manifested in these competitors’ economic performance.

Original languageEnglish (US)
Pages (from-to)201-259
Number of pages59
JournalJournal of Accounting Research
Issue number1
StatePublished - Mar 2022

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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