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The effect of tax avoidance crackdown on corporate innovation

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  • Li, Qin
  • Ma, Mark (Shuai)
  • Shevlin, Terry

Abstract

To constrain the use of intangible assets in tax-motivated state income shifting, many U.S. state governments adopted addback statutes. Addback statutes reduce the tax benefits that firms can gain from creating intangible assets such as patents. Using a sample of U.S. public firms, we examine the effect of addback statutes on corporate innovation behavior. First, the adoption of addback statutes leads to a 4.77 percentage point decrease in the number of patents and a 5.12 percentage point decrease in the number of patent citations. Second, the “disappearing patents” resulting from addback statutes have significant economic value. Third, after a state adopts an addback statute, a firm with material subsidiaries in that state assigns fewer patents to subsidiaries in zero-tax states, whereas the number of patents assigned to the other states does not change. Overall, our findings suggest that addback statutes impede corporate innovation.

Suggested Citation

  • Li, Qin & Ma, Mark (Shuai) & Shevlin, Terry, 2021. "The effect of tax avoidance crackdown on corporate innovation," Journal of Accounting and Economics, Elsevier, vol. 71(2).
    • Handle: RePEc:eee:jaecon:v:71:y:2021:i:2:s0165410120300847
    DOI: 10.1016/j.jacceco.2020.101382
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    Keywords

    Addback statutes; Innovation; Tax avoidance crackdown; Tax-motivated income shifting;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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