Premium
Taxes and Corporate Policies: Evidence from a Quasi Natural Experiment
Author(s) -
DOIDGE CRAIG,
DYCK ALEXANDER
Publication year - 2015
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12101
Subject(s) - incentive , leverage (statistics) , natural experiment , monetary economics , business , surprise , event study , corporate tax , cash , enterprise value , economics , accounting , finance , tax avoidance , microeconomics , double taxation , psychology , social psychology , paleontology , statistics , context (archaeology) , mathematics , machine learning , computer science , biology
We document important interactions between tax incentives and corporate policies using a “quasi natural experiment” provided by a surprise announcement that imposed corporate taxes on a group of Canadian publicly traded firms. The announcement caused a dramatic decrease in value. Prospective tax shields partially offset the losses, adding 4.6% to firm value on average, and vary with the tax status of the marginal investor. Further, firms adjust leverage, payout, cash holdings, and investment in response to changing tax incentives. Overall, the event study and time series evidence supports the view that taxes are important for corporate decision making.