tax-motivated profit adjustments. Thus, we expect income shifting to be associated with level overinvestment. We use affiliate-level data to develop a firm-specific measure of sensitivity to tax incentives to identify income shifting firms. Using this measure, we estimate a positive relation between total consolidated investment and income shifting aggressiveness that is incremental to differences in growth opportunities and cash flow. Our findings empirically test the theory in prior literature that transfer pricing methods and tax incentives can lead to distortions in production decisions. Additionally, we extend the literature on investment distortions by documenting that routine and necessary financial decisions can also distort investment levels.
tax-motivated profit adjustments. Thus, we expect income shifting to be associated with overinvestment. We use affiliate-level data to develop a firm-specific measure of sensitivity to tax incentives to identify income shifting firms. Using this measure, we estimate a positive relation between total consolidated investment and income shifting aggressiveness that is incremental to differences in growth opportunities and cash flow. Our findings empirically test the theory in prior literature that transfer pricing methods and tax incentives can lead to distortions in production decisions. Additionally, we extend the literature on investment distortions by documenting that routine and necessary financial decisions can also distort investment levels. level
NTA2017-86.docx