Essays on the impact of corporate taxation on firm outcomes.

This thesis consists of three distinct studies (chapters 1-3) that all focus on tax planning and how it impacts firm outcomes. Chapter 1: We investigate whether firm’s performance is influenced by the employment of top executives who exert a significant effect on their firm’s effective tax rate. Research by Dyreng et al. (2010) provides evidence of the magnitude of top executives’ effect on their firm’s ETR, and calls for research on the consequences of this behavior. Although tax avoidance might contribute to after-tax firm performance, it is possible that costs associated with executive-induced tax planning outweigh the benefits of the reduction in explicit taxes. After classifying executives in terms of their influence on their firm’s GAAP ETR and CASH ETR, we investigate in which firm environment these executives operate and study their influences on firm performance. We observe that the presence of a CASH ETR-decreasing executive has a negative impact on pre-tax performance, indicating that there are significant trade-off costs related to reducing cash taxes. However, we find no overall effect on after-tax performance. After-tax performance is only impacted negatively by CASH ETR-decreasing CEOs or executives with longer tenure. A GAAP ETR-increasing executive has a positive impact on pre-tax performance, which partially persists in after-tax performance. We find weak evidence of a positive impact on return on equity. This effect is especially pronounced for CEOs and executives that are employed for a longer time period. We conclude that the employment of an ETR-decreasing executive is not necessarily beneficial for after-tax firm performance. Chapter 2: This study contributes to the literature by examining small and medium-sized enterprises’ intentions to plan taxes, the extent to which they undertake tax planning efforts, the tax planning process and the influence of the executives involved. Our empirical analyses are based on data collected through an online survey with SME managers in Belgium. We estimate a logistic model that captures the likelihood of engaging in tax planning for 101 SMEs and find that both regulation-specific knowledge and executive tenure positively influence the likelihood of engaging in tax planning activities. We also find limited evidence that the probability of planning taxes increases if the firm had a prior engagement with an external tax advisor. While investigating the impact of tax planning efforts on firm outcomes (by measuring changes in Delta), we find that tax planning does not appear to have a consistent effect. The results demonstrate the usefulness of the upper echelons theory in identifying determinants of tax planning. In addition, the results show that tax planning efforts are not necessarily captured by tax measures reported in financial statements. Chapter 3: This study examines how firms shift profits from one period to another in response to the introduction of an allowance for corporate equity (ACE). We focus on the introduction of the risk capital allowance (RCA) in Belgium by the law of June 22nd, 2005. We predict and find that firms with relatively low (but positive) earnings in 2006 have incentives to defer profits in 2005 and that this effect is stronger for firms with higher equity ratios. Conversely, we predict that firms that are highly profitable in 2006 and have net operating loss carryforwards in 2005 have incentives to accelerate profits. We find that only subsets of firms react to this incentive: these are firms with a longer time lag between the book year end and the filing date, firms with higher equity ratios and firms that do not issue equity. In sum, our results show that tax-related benefits motivate firms to engage in conforming tax avoidance and provide evidence of cross-sectional variations in the reaction to these incentives. In addition, our results contribute to the literature that outlines the costs and benefits of changes in tax regimes.status: publishe