Tax Policy and Abnormal Investment Behavior

Qiping Xu, Eric Zwick

NBER Working Paper No. 27363
Issued in June 2020
NBER Program(s):Corporate Finance, Economic Fluctuations and Growth, Public Economics

This paper documents tax-minimizing investment, in which firms tilt capital purchases toward fiscal year-end to reduce taxes. Between 1984 and 2013, average investment in fiscal Q4 exceeds the average of fiscal Q1 through Q3 by 37%. Q4 spikes occur in the U.S. and internationally. Research designs using variation in firm tax positions and the 1986 Tax Reform Act show that tax minimization causes spikes. Spikes increase when firms face financial constraints or higher option values of waiting until fiscal year-end. We develop an investment model with tax asymmetries to rationalize these patterns. Models without purchase-year, tax-minimization motives are unlikely to fit the data.

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Document Object Identifier (DOI): 10.3386/w27363