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Taxes, Keiretsu Affiliation, and Income Shifting

Author

Listed:
  • Jeffrey D. Gramlich

    (University of Hawai'i, and University of Michigan)

  • Piman Limpaphayom

    (Chulalongkorn University (Thailand))

  • S. Ghon Rhee

    (University of Hawai'i)

Abstract

This paper provides evidence that keiretsu group member firms are subject to lowereffective tax rates than independent firms in Japan. As one explanation for this phenomenon, wedevelop a hypothesis that keiretsu firms strategically shift financially reported income amongaffiliates in order to reduce overall effective tax rates. Empirical evidence supports this income-shifting hypothesis since the positive relationship between pretax return m firm value and marginaltax rate status is significantly mitigated by keiretsu membership. Further, it appears that keiretsuincome shifting activities intensify when Japanese firms face economic recession, contrastingconjecture of weakening strength of keiretsu affiliation during this period. We also find evidencesupporting the view that benefactors of shifted income are compensated via increased dividends.

Suggested Citation

  • Jeffrey D. Gramlich & Piman Limpaphayom & S. Ghon Rhee, 2002. "Taxes, Keiretsu Affiliation, and Income Shifting," Tinbergen Institute Discussion Papers 02-114/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20020114
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    References listed on IDEAS

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    More about this item

    Keywords

    Keyretsu; income shifting; marginal tax rate.;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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