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Does tax reform affect labor investment efficiency?

Author

Listed:
  • Kaplan, Steven E.
  • Lee, Eugie Y.

Abstract

We investigate whether the Tax Cuts and Jobs Act (TCJA) impacts labor investment efficiency. By lowering the top corporate tax rate from 35% to 21%, ceteris paribus, the TCJA provides firms with a cash windfall. Based on difference-in-differences analysis using non-US based firms as a control group, we find that in the post-TCJA years, labor investment inefficiency increased for US based, but not for non-US based, firms. Further, the increase in labor investment inefficiency is concentrated among US firms with high cash holdings, suggesting that these firms face higher agency costs in the post-TCJA period. Additional analysis suggests that in the post-TCJA period, managers of high cash holding firms were seeking a quiet life. We find weak evidence that strong corporate governance mitigated this negative behavior. Overall, our findings show that tax reform can impact labor investment efficiency and should be of interest to investors, boards of directors, tax authorities, and to researchers.

Suggested Citation

  • Kaplan, Steven E. & Lee, Eugie Y., 2024. "Does tax reform affect labor investment efficiency?," Journal of Corporate Finance, Elsevier, vol. 89(C).
    • Handle: RePEc:eee:corfin:v:89:y:2024:i:c:s0929119924001354
    DOI: 10.1016/j.jcorpfin.2024.102673
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    More about this item

    Keywords

    Tax reform; Cash-rich firms; TCJA; Labor investment efficiency;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • M54 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Labor Management

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