Working Papers

Does Foreign Tax Arbitrage Promote Innovation?
Abstract: I identify a new category of fiscal policy instruments – those regulating profit shifting activity – as an important determinant of corporate innovation. Using confidential microdata on the foreign and domestic operations of U.S. multinational firms, I document that after an unexpected policy shock that facilitated foreign tax arbitrage, U.S. multinationals shifted more of their taxable income and intellectual property to low tax countries. This increased the after-tax return to innovative activity. In response, U.S. multinationals increased their innovation in the U.S., whether measured using R&D expenditures, patent applications, or patent citations.

Foreign investment of US multinationals: the effect of tax policy and agency conflicts
With Brent Glover and Oliver Levine.
Abstract: We study the effect of corporate tax policy on foreign investment and cash holdings using a dynamic model calibrated to confidential data on the foreign operations of US multinationals. Prior to the 2017 Tax Cut and Jobs Act, the US tax code encouraged excess foreign investment by depressing the opportunity cost of capital. The switch to a territorial system following the reform reduces the optimal level of foreign investment by 9.7% for the average US multinational, despite lowering the tax rate on foreign earnings. The decline in investment is larger for goods producers and firms with less severe agency conflicts.

The Real Effects of U.S. Tax Arbitrage by Foreign Multinational Firms
Abstract: Controlled foreign corporation (CFC) laws are designed to restrict the tax arbitrage activities of multinational firms. Using confidential microdata, I estimate a difference-in-differences specification to study how these laws relate to the profitability and real economic activity of foreign owned U.S. subsidiaries. I find that when a U.S. subsidiary’s foreign parent is subject to a CFC law, the subsidiary’s return on assets increases 5 percentage points, suggesting a restricted ability to allocate U.S. income to lower tax foreign jurisdictions. The laws are also associated with lower employment and capital investment in the U.S., as well as a lower likelihood of a foreign firm establishing U.S. operations.

Short Selling Governance and Intrafirm Resource Allocation
With Andrew Bird, Stephen A. Karolyi, and Thomas G. Ruchti.
Abstract: We exploit Regulation SHO as a natural experiment to investigate the effects of short selling threats on intrafirm capital allocation. Using detailed data on the foreign operations of multinationals, we find that the marginal effect on aggregate investment masks a significant effect on intrafirm reallocation. Managers reallocate investment and R&D expenditures across borders toward productive subsidiaries and R&D centers, respectively. Treated firms shifted 30% more capital toward foreign subsidiaries with strong recent performance. These results provide new evidence on the scope and potential benefits of governance by short sellers and demonstrate the importance of cross-border spillovers of capital markets regulation.

Heads I win, tails you lose: asymmetric taxes, risk taking, and innovation
With Brent Glover and Oliver Levine.

The Direct Investment Returns Puzzle