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Windfalls? Costs and benefits of investment tax incentives due to financial constraints

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  • Orihara, Masanori
  • Suzuki, Takafumi

Abstract

We find that financially unconstrained firms claim temporary investment tax incentives more frequently than their constrained counterparts. Notably, these extensive claims from unconstrained firms do not lead to an incremental total investment beyond pre-claim levels; instead, these firms appear to treat the tax cut as a windfall, increasing their cash holdings in subsequent years. In contrast, constrained firms increase their investments relative to pre-claim levels when they manage to claim tax incentives. Our analysis draws from a 2014 tax reform in Japan which introduced both an investment tax credit and bonus depreciation, available for nearly three years. We use a proprietary tax return survey that provides data on tax incentive claims across both public and private firms. Our findings highlight a novel tradeoff of investment tax incentives: while stimulating investments among financially constrained firms upon claiming tax incentives, they also disproportionately allocate tax benefits to unconstrained firms, not necessarily resulting in the intended investment stimulation.

Suggested Citation

  • Orihara, Masanori & Suzuki, Takafumi, 2023. "Windfalls? Costs and benefits of investment tax incentives due to financial constraints," Journal of Corporate Finance, Elsevier, vol. 82(C).
  • Handle: RePEc:eee:corfin:v:82:y:2023:i:c:s0929119923001189
    DOI: 10.1016/j.jcorpfin.2023.102469
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    References listed on IDEAS

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    1. Lei Zhang & Yuyu Chen & Zongyan He, 2018. "The effect of investment tax incentives: evidence from China’s value-added tax reform," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(4), pages 913-945, August.
    2. Bigelli, Marco & Sánchez-Vidal, Javier, 2012. "Cash holdings in private firms," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 26-35.
    3. Mortal, Sandra & Nanda, Vikram & Reisel, Natalia, 2020. "Why do private firms hold less cash than public firms? International evidence on cash holdings and borrowing costs," Journal of Banking & Finance, Elsevier, vol. 113(C).
    4. Goodman-Bacon, Andrew, 2021. "Difference-in-differences with variation in treatment timing," Journal of Econometrics, Elsevier, vol. 225(2), pages 254-277.
    5. James Alm & Yongzheng Liu & Kewei Zhang, 2019. "Financial constraints and firm tax evasion," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(1), pages 71-102, February.
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    Cited by:

    1. Eichfelder, Sebastian & Knaisch, Jonas David & Schneider, Kerstin, 2025. "Bonus depreciation as instrument for structural economic policy: Effects on investment and asset structure," arqus Discussion Papers in Quantitative Tax Research 288, arqus - Arbeitskreis Quantitative Steuerlehre.
    2. Hiroki Kato & Tsuyoshi Goto & Youngrok Kim, 2023. "Tax-Price Elasticities of Charitable Giving and Selection of Declaration: Panel Study of South Korea," Discussion Papers in Economics and Business 23-05, Osaka University, Graduate School of Economics.

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    More about this item

    Keywords

    Financial constraint; Investment tax incentive; Tax claim; Cash holdings;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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