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 lower effective tax rates than independent firms in Japan. As one explanation for this phenomenon, we develop a hypothesis that keiretsu firms strategically shift financially reported income among affiliates 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 marginal tax rate status is significantly mitigated by keiretsu membership. Further, it appears that keiretsu income shifting activities intensify when Japanese firms face economic recession, contrasting conjecture of weakening strength of keiretsu affiliation during this period. We also find evidence supporting the view that benefactors of shifted income are compensated via increased dividends.
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Find related papers by JEL classification: G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
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