TY - JOUR
T1 - Competitive Externalities of Tax Cuts
AU - Donohoe, Michael P.
AU - Jang, Hansol
AU - Lisowsky, Petro
N1 - Funding Information:
Accepted by Christian Leuz. We appreciate helpful comments from William Ciconte, Paul Demeré, Fei Du, Alex Edwards, Brian Gale, Kamber Hetrick, Sara Malik, Lillian Mills, Marcel Olbert, Caspar David Peter (discussant), Matthias Petutschnig (discussant), David Samuel, Harm Schütt, Lisa De Simone (discussant), Jake Thornock, Oktay Urcan, Shuyang Wang, Hayoung Yoon, two anonymous reviewers, and workshop and research session participants at the American Taxation Association Midyear Meeting, American Accounting Association Annual Meeting, Berlin‐Vallendar Conference on Tax Research, Boston University Accounting Conference, UCLA Accounting Conference, Brigham Young University, Ludwig‐Maximillian University of Munich, University of Hong Kong, University of Notre Dame, University of Illinois at Urbana‐Champaign, University of Mannheim, University of Miami, University of Missouri, and Vienna University of Economics and Business. Donohoe appreciates the support of the PwC Faculty Fellowship at the University of Illinois at Urbana‐Champaign. Repatriation data used in this manuscript are available from the authors upon request.
Publisher Copyright:
© 2021 The Chookaszian Accounting Research Center at the University of Chicago Booth School of Business
PY - 2022/3
Y1 - 2022/3
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=85118388288&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85118388288&partnerID=8YFLogxK
U2 - 10.1111/1475-679X.12403
DO - 10.1111/1475-679X.12403
M3 - Article
AN - SCOPUS:85118388288
SN - 0021-8456
VL - 60
SP - 201
EP - 259
JO - Journal of Accounting Research
JF - Journal of Accounting Research
IS - 1
ER -