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Tax Policy and Abnormal Investment Behavior

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  • Qiping Xu
  • Eric Zwick

Abstract

This paper studies tax-minimizing investment, whereby firms tilt capital purchases toward year-end to reduce taxes. We use this pattern to characterize how taxes affect investment behavior. We exploit variation in firm tax positions from administrative data to confirm that tax minimization causes spikes. Spikes increase when firms face financial constraints or higher option values of waiting. Cumulative investment does not completely reverse after spikes. We develop an investment model with tax asymmetries to rationalize these patterns. Both depreciation motives (later investments face lower effective tax rates) and option value motives (tax asymmetry implies time-varying opportunities to minimize taxes) are necessary to fit the data. (JEL G31, G38, H25)

Suggested Citation

  • Qiping Xu & Eric Zwick, 2024. "Tax Policy and Abnormal Investment Behavior," The Review of Financial Studies, Society for Financial Studies, vol. 37(10), pages 2971-3023.
    • Handle: RePEc:oup:rfinst:v:37:y:2024:i:10:p:2971-3023.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhae040
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    More about this item

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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