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Corporation Tax Asymmetries and Firm-Level Investment in Canada

  • 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)

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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File URL: http://www-2.rotman.utoronto.ca/iib/ITP0303.pdf
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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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  1. MacKie-Mason, Jeffrey K, 1990. " Do Taxes Affect Corporate Financing Decisions?," Journal of Finance, American Finance Association, vol. 45(5), pages 1471-93, December.
  2. 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.
  3. Lawrence H. Summers, 1986. "Investment Incentives and the Discounting of Depreciation Allowances," NBER Working Papers 1941, National Bureau of Economic Research, Inc.
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  5. John B. Shoven & Michael Topper, 1992. "The Cost of Capital in Canada, the United States, and Japan," NBER Chapters, in: Canada-U.S. Tax Comparisons, pages 217-236 National Bureau of Economic Research, Inc.
  6. Colin Mayer, 1986. "Corporation Tax, Finance and the Cost of Capital," Review of Economic Studies, Oxford University Press, vol. 53(1), pages 93-112.
  7. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119, May.
  8. Roger H. Gordon & John D. Wilson, 1986. "Measuring the Efficiency Cost of Taxing Risky Capital Income," NBER Working Papers 1992, National Bureau of Economic Research, Inc.
  9. Hausman, Jerry & Hall, Bronwyn H & Griliches, Zvi, 1984. "Econometric Models for Count Data with an Application to the Patents-R&D Relationship," Econometrica, Econometric Society, vol. 52(4), pages 909-38, July.
  10. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
  11. Pierre-Pascal Gendron, 2001. "Corporation Tax Asymmetries and Cartel Unity," International Tax and Public Finance, Springer, vol. 8(5), pages 659-674, November.
  12. Rosanne Altshuler & Alan J. Auerbach, 1987. "The Significance of Tax Law Asymmetries: An Empirical Investigation," NBER Working Papers 2279, National Bureau of Economic Research, Inc.
  13. Alan J. Auerbach, 1986. "The Dynamic Effects of Tax Law Asymmetries," Review of Economic Studies, Oxford University Press, vol. 53(2), pages 205-225.
  14. Edwards, J. S. S. & Mayer, C. P., 1991. "Leasing, taxes, and the cost of capital," Journal of Public Economics, Elsevier, vol. 44(2), pages 173-197, March.
  15. 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.
  16. Blundell, Richard & Bond, Stephen & Devereux, Michael & Schiantarelli, Fabio, 1992. "Investment and Tobin's Q: Evidence from company panel data," Journal of Econometrics, Elsevier, vol. 51(1-2), pages 233-257.
  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.
  18. 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.
  19. Kenneth McKenzie & Jack Mintz, 1992. "Tax Effects on the Cost of Capital," NBER Chapters, in: Canada-U.S. Tax Comparisons, pages 189-216 National Bureau of Economic Research, Inc.
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