Why do not all firms engage in tax avoidance?
Martin Jacob & Anna Rohlfing-Bastian
Higher after-tax cash flows and an enhanced firm value – those are the benefits of legal tax-avoidance. Engaging in tax-planning activities that aim to avoid taxes legally thus seems to be a reasonable strategy for every firm. However, empirical studies show that not all firms engage equally in tax avoidance. While the current literature has a difficult time explaining the wide variation in tax avoidance across firms, Martin Jacob, Anna Rohlfing-Bastian and Kai Sandner found a way to theoretically explain a part of this so-called “Under-Sheltering Puzzle”. They developed a formal model that sheds light on why some firms are prone to use the benefits of tax avoidance while others are not.
Fact or fake news: Do German corporations pay only two thirds of the regular tax rate?
Hans-Peter Huber & Ralf Maiterth
Hans-Peter Huber and Ralf Maiterth (Humboldt University of Berlin) scientifically reviewed and ultimately refuted a study that initially brought some explosive news to light. The study “Effective Tax Rates of Multinational Enterprises in the EU” (Janský 2019), commissioned by the Greens in the European Parliament, concluded that companies in Germany pay, on average, only two thirds of the regular tax rate. This news was heavily debated in both the media and political circles when the study was published in early 2019. Hans-Peter Huber and Ralf Maiterth have scrutinized Jansky’s study, and conclude that the difference between the regular tax rate and effective tax rate is, in fact, negligible.
Private Equity: Better Performance with Deal-by-Deal Contracts in Venture Capital Partnerships
How does the contract of the fund manager influence the performance of a private equity fund? A team of reseachers, including Sönke Sievers, investigated this question. Their empirical analysis shows that the timing of the fund’s manager’s payment has a measurable impact on the fund’s performance. If the payment timing is rather favorable for the fund manager, the fund tends to offer higher returns for the investors, as Sievers explains below.
Comparing Tax Complexity: Germany vs. Austria
Thomas Hoppe & Susann Sturm
Is the grass always greener on the other side? Interestingly, after reviewing the complexity of the tax systems in Germany and Austria, the researchers Thomas Hoppe, Martina Rechbauer, and Susann Sturm find that in many cases the grass is often almost exactly the same, since the tax systems of both countries often display an equal degree of complexity. However, in a few cases, the grass is actually greener on the other side of the border. The researchers therefore argue that both countries have room for improvement, and that they should carefully look at their neighbor and review, and possibly update, their own system accordingly. Some main findings are summarized as a visual.
Investors’ reactions to country-by-country reporting
Katharina Nicolay & Johannes Voget
EU citizens should be able to assess whether banks are paying their “fair share of taxes” in the countries they operate in. This call is especially important given the central role of banks and the large number of public subsidies they have received during the financial crisis. This purpose was the line of thought of European Parliamentarians when they, in 2013, quite spontaneously, pushed for a mandatory increase in tax transparency, leading to the political decision to adopt a public country-by-country reporting obligation for EU financial institutions. A team of researchers from the University of Mannheim, including Katharina Nicolay and Johannes Voget, investigated the capital market reaction to this decision. How did investors react to the increase in tax transparency induced by the new legislation?
Organizational design is an important determinant of firm transparency. In a recent study published in Management Science, Anja Schöttner, together with Matthias Kräkel, investigated what happens when a firm delegates more pricing authority to its sales persons. The fundamental problem is that, from the companies’ point of view, the pricing behavior between their sales agents and customers can lack transparency. Kräkel and Schöttner analyze how this problem affects the optimal contract design and delegation of decision rights to the sales agent.
Targeted Transparency: Nudging Firms towards changing their Business Activities in Socially Desirable Ways
Katharina Hombach & Thorsten Sellhorn
Nudging is said to be an alternative way to achieve compliance, contrasting more heavy-handed methods such as command-and control legislation. Katharina Hombach and Thorsten Sellhorn showed that nudging and transparency can go hand in hand. They examined ‘targeted transparency‘ regulation, which is aimed at nudging firms towards changing their business activities in socially desirable ways. In their review paper, they developed a framework that lays out the necessary conditions under which targeted transparency regulation can be effective, and reviewed the emerging empirical evidence.
Measuring Political Risk and its Effects on Firms
Laurence van Lent
Most people think that corporate disclosures are all about numbers and hard facts. While numbers play a central role, recent developments in machine learning and computational linguistics show that much more can be learned about important issues faced by companies, which is “hidden” between the numbers. Laurence van Lent’s research attempts to uncover this hidden information. Together with a team of international researchers he recently developed and published a measure for a firm’s exposure to political risk by using information gleaned from discussions between management and financial analysts in earnings conference calls.
Caren Sureth-Sloane & Joachim Gassen
Transparency is not only our research topic but also the guiding principle of our work. Thus, we will make our work transparent by sharing our research outcomes (data, code and more) with the academic community. In addition, members of the TRR 266 will blog about their work, findings in relation to current topics, developments and events they might come across. We will kick off the blog series with the initiators and spokespersons of the TRR 266, and strong advocates of open science and science communication: Caren Sureth-Sloane and Joachim Gassen.