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Corporation Tax Asymmetries and Firm-Level Investment in Canada

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Author Info

  • Pierre-Pascal Gendron

    (The Business School, Humber Institute of Technology & Advanced Learning and International Tax Program, Rotman School of Management, University of Toronto)

  • Gordon Anderson

    ()
    (Department of Economics, University of Toronto)

  • Jack M. Mintz

    (Rotman School of Management, University of Toronto)

Abstract

An empirical model is developed to estimate the probability of a given tax status based on firm characteristics. A structural switching regression model of the firm’s demand for capital goods is next specified and incorporates expressions for the user cost of capital which account for tax asymmetries. The switching model, which incorporates the estimated tax status probabilities, is used to investigate the potential endogeneity of the cost of capital using a balanced panel of Canadian companies over the period 1976-94. Empirical results suggest that tax status affects capital acquisition behaviour.

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Bibliographic Info

Paper provided by International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto in its series International Tax Program Papers with number 0303.

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Length: 54 Pages
Date of creation: Oct 2003
Date of revision:
Handle: RePEc:ttp:itpwps:0303

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Keywords: Corporation Tax; Losses; Investment; Regime Switching;

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References

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  1. Altshuler, Rosanne & Auerbach, Alan J, 1990. "The Significance of Tax Law Asymmetries: An Empirical Investigation," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 61-86, February.
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  7. MacKie-Mason, Jeffrey K, 1990. " Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-93, December.
  8. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  9. Jack M. Mintz, 1987. "An Empirical Estimate of Corportate Tax Refundability and Effective Tax Rates," Carleton Industrial Organization Research Unit (CIORU) 87-02, Carleton University, Department of Economics.
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  12. Jan Bartholdy & Gordon R. Fisher & Jack Mintz, 1989. "An Empirical Study of the Impact of Corporate Taxation on the Debt Policy of Canadian Firms," Working Papers 742, Queen's University, Department of Economics.
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  15. Devereux, Michael P, 1989. "Tax Asymmetries, the Cost of Capital and Investment: Some Evidence from United Kingdom Panel Data," Economic Journal, Royal Economic Society, vol. 99(395), pages 103-12, Supplemen.
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  17. Jason G. Cummins & Kevin A. Hassett & R. Glenn Hubbard, 1994. "A Reconsideration of Investment Behavior Using Tax Reforms as Natural Experiments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(2), pages 1-74.
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Cited by:
  1. Shaun K. Roache, 2006. "Domestic Investment and the Cost of Capital in the Caribbean," IMF Working Papers 06/152, International Monetary Fund.

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