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Business Taxation, Corporate Finance and Economic Performance

  • Christian Keuschnigg

    ()

  • Evelyn Ribi

    ()

This survey of recent research in corporate finance discusses how business taxes, subsidies as well as a country's institutional development affect several important decision margins of heterogeneous firms. We argue that innovative firms, as a result of agency problems between insiders and outside investors, are most frequently finance constrained. We discuss how profit taxes reduce investment of constrained firms by their effect on cash-flow, and of unconstrained firms by their effect on the user cost of capital. Moreover, tax reform as well as tax financed R&D subsidies can enhance aggregate investment, innovation and efficiency by implicitly redistributing profits towards constrained firms where capital earns the highest return. We argue that the corporate legal form improves firms' access to external funds. We then explain the firms' choice between venture capital and bank financing and discuss how business taxation can affect venture capital financing on both the extensive and intensive margins. Finally, we review theory and evidence on how corporate finance may shape a country's comparative advantage in innovative industries as well as aggregate labor market performance when part of firms are finance constrained.

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Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2010 with number 2010-04.

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Length: 45 pages
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:usg:dp2010:2010-04
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