Kinky Tax Policy and Abnormal Investment Behavior

Qiping Xu, Eric Zwick

Research output: Working paper

Abstract

This paper documents tax-minimizing investment, in which firms accelerate capital purchases near fiscal year-end to reduce taxes. Between 1984 and 2013, average investment in fiscal Q4 exceeds the average of fiscal Q1 through Q3 by 37%. Q4 spikes occur in the U.S. and internationally. Research designs using variation in firm tax positions and the 1986 Tax Reform Act show that tax minimization causes spikes. Spikes increase when firms face financial constraints or higher option values of waiting. We develop an investment model with tax asymmetries to rationalize these patterns. Models without purchase-year, tax-minimization motives are unlikely to fit the data.
Original languageEnglish (US)
Number of pages53
DOIs
StatePublished - Jul 15 2017
Externally publishedYes

Fingerprint

Tax
Investment behavior
Tax policy
Fiscal
Purchase
Tax reform
Option value
Asymmetry
Research design
Financial constraints

Keywords

  • Tax Policy
  • Business Investment

Cite this

Kinky Tax Policy and Abnormal Investment Behavior. / Xu, Qiping; Zwick, Eric.

2017.

Research output: Working paper

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