@article{df173db33f224ec887abb8d96556d68f,
title = "Tax Policy and Abnormal Investment Behavior",
abstract = "This paper studies tax-minimizing investment, whereby firms tilt capital purchases toward year-end to reduce taxes. We use this pattern to characterize how taxes affect investment behavior. We exploit variation in firm tax positions from administrative data to confirm that tax minimization causes spikes. Spikes increase when firms face financial constraints or higher option values of waiting. Cumulative investment does not completely reverse after spikes. We develop an investment model with tax asymmetries to rationalize these patterns. Both depreciation motives (later investments face lower effective tax rates) and option value motives (tax asymmetry implies time-varying opportunities to minimize taxes) are necessary to fit the data.",
author = "Qiping Xu and Eric Zwick",
note = "The views expressed here are ours and do not necessarily reflect those of the U.S. Treasury Office of Tax Analysis or of the IRS Office of Research, Analysis and Statistics. We thank Andy Abel, Heitor Almeida, Philip Bond, Jediphi Cabal, Bob Chirinko, Mike Devereux, Martin Feldstein, John Guyton, Jim Hines, Martin Jacob, Justin Murfin, Tom Neubig, Mitchell Petersen, Annette Portz, Jim Poterba, Josh Rauh, Lisa Rupert, Joel Slemrod, Michael Smolyansky, Amir Sufi, Toni Whited, and seminar and conference participants for comments, ideas, and help with data. We thank Thomas Winberry and Irina Telyukova for sharing code. We thank Tianfang (Tom) Cui, Harleen Kaur, Laurence O\u2019Brien, Ramiro Rossi, Iris Song, Caleb Wroblewski, and especially thank Francesco Ruggieri for excellent research assistance. Xu thanks the Mendoza College of Business at the University of Notre Dame and Gies College of Business at University of Illinois Urbana Champaign for financial support. Zwick gratefully acknowledges financial support from the Neubauer Family Foundation, the Initiative on Global Markets, and the Booth School of Business at the University of Chicago. can be found on The Review of Financial Studies web site. R&D is net of R&D-related salary and benefit expenses, which is calculated at the industry average according to the Business Research and Development and Innovation Survey (BRDIS), conducted by the National Science Foundation. We assume that salary and benefit expenses are flat over the four quarters in the same fiscal year. Fiscal Q4 R&D spikes are robust to including salary and benefit expenses. R&D spikes are smaller after 2001. We have confirmed that this change in R&D spikes is not due to adjustment of salary and benefit expenses in the R&D calculation, reporting frequency, or outsourcing and firms\u2019 foreign sales. We leave further investigation of R&D spikes to future research.",
year = "2024",
month = oct,
day = "1",
doi = "10.1093/rfs/hhae040",
language = "English (US)",
volume = "37",
pages = "2971--3023",
journal = "Review of Financial Studies",
issn = "0893-9454",
publisher = "Oxford University Press",
number = "10",
}