The Impact of Corporate income Tax and Firm Size on Fixed Investment
Subject Areas : International Journal of Finance, Accounting and Economics Studies
Omer
Saeed
1
(Institute of Business & Management, University of engineering and technology, Pakistan)
Sidra
Shafiq
2
(Institute of Business & Management, University of engineering and technology, Pakistan)
Khurram
Shahzad
3
(Institute of Business & Management, University of engineering and technology, Pakistan)
Keywords: Tangible assets, fixed investment, market capitalization, income taxes,
Abstract :
This paper is an attempt to analyze the impact of income taxes and market capitalization on fixed investment (investment in tangible assets) by manufacturing companies listed on KSE. This paper basically examines that how corporate income taxes affect fixed investment by reducing cash flow available for a firm to invest and how the firm size in the lights of market capitalization affects fixed investment by manufacturing companies. As market capitalization leads to development and due to this development investment opportunities increase. Estimation is based on pooled regression by employing fixed effect model. The results of the study show that there is positive impact of market capitalization and fixed investment while there is negative impact of income taxes and fixed investment by manufacturing companies.
* Auerbach, Alan J. and Kevin Hasset,Recent U.S. Investment Behavior and the TaxReform Act of 1986: A Disaggregate View mimeo University of Pennsylvania, October 1990b.
* Ahsan, S. M. (1989). Choice of tax base under uncertainty. Journal of Public Economics 40 (October): 99- 134. 1990. Risk-taking, savings, and taxation: A re-examination of theory and policy. Canadian Journal of Economics 23 (May): 408-433.
* Auerbach, Alan (1979) Inflation and the Choice of Asset Life Journal of Political Economy87(3): 621-38.
* Auerbach, A. and J. Poterba (1987). Tax-loss Carryforwards and Corporate Tax Incentives in Martin Feldstein, ed: Taxes and Capital Formation (University of ChicagoPress).
* Audretsch, David B. Elston, Julie Ann (2000). Does firm size matter? Evidence on the impact of liquidity constraint on firm investment behavior in Germany, HWWA Discussion Paper, No. 113.
* Altshuler, R. and H. Grubert (2003). Repatriation Taxes, Repatriation Strategies and Multinational Financial Policy Journal of Public Economics 87, 73-107
* Alexander Kurshev, IlyaA. Strebulaev (October 2005). Firm Size and Capital Structure Graduate School of Business Stanford University.
* Auerbach, Alan J (1979). Wealth Maximization and the Cost of Capital. Quarterly Journal of Economics, 93(3): 433-46.
* Alan J. Auerbach and Kevin Hassett (1991). National Bureau of Economic Research 1050 Massachusetts Avenue Cambridge MA 02138 working papers no 3619.
* Auerbach, A., Hassett, K. and Sodersten, J. (1995). Taxation and corporate investment. The Impact of the 1991 Swedish Tax Reform NBER Working Paper No. 5189.
* Borderching, Thomas and Eugene Silberberg (1978). Shipping the Good Apples Out: The Alchianand Allen Theorem Reconsidered Journal of Political Economy, 86(1): 131.138.
* Becker et.al (2006). Corporate Income Tax Reform and Foreign Direct Investment in Germany Evidence from Firm-Level DatCesifo Working Paper No. 1722 Category 1 Public Finance
* Bond, Steve, Julie Ann Elston, Jacques Mairesse, and Benoit Mulkay (1997). A Comparison of Empirical Investment Equations Using Company Panel Data for France, Germany, Belgium.
* Bond, Stephen R./Devereux, Michael P. (1995). A Note on the Taxation of Capital and Economic Rents, IFS Working Paper Series No. W95/18.
* Bernstein, J. I., and M. I. Nadiri. (1986). Financing and investment in plant and equipment and research and development. In Prices, competition and equilibrium, ed. M. H. Preston and R. E. Quandt. Oxford: Philip & Allen.
* Boura, P., Koumanakos, E. and Georgopoulos A.(2006). Tax Incentives and Financial Reporting of Greek Firms: an Empirical Enquiry, Business and Economics Anthology, Vol. 1, pp. 87-94 National Economics 62: 337–58.
* Bucovetsky,S., (1991) Asymmetric tax competition, Journal of Urban Economics 30 167-181.
* BANZ, ROLF W., (1981) The Relationship Between Return and the Market Value of Common Stocks Journal of Financial Economics 9, 3-18.
* Bucovetsky, Sam and Haufler, Andreas (2005).Tax competition when firms choose their organizational form: Should tax loopholes for multinationals be closed? Technical Report 1625, CESifo
* Connolly, R.A and Hirschey,M (2005). Firm size and the effect of R&D on Tobin’s q, R&D Mangement, 35,2, p.217-223
* Chisik,Richard, and RonaldD . Davies( 2004) AsymmetricF DI andt ax treatybargaining: theory and evidence,' Journal of Public Economics 88, 1119-48
* Cummins, J., Hasset, K. and Hubbard, G. (1996) Tax reforms and investment: a cross-country comparison, NBER Working Paper No. 5232.
* Cohen, W.M. and Klepper, S, (1996) A reprise of size and R&D, The Economic Journal, vol.106, N°43, p.925-951
* Cheng Fan-Fah, ShamsherMohd, Annuar Nasir (2008) Earnings Announcements: The Impact of Firm Size on Share Prices”, Journal of Money, Investment and Banking ISSN 1450-288X, Issue 3 (2008), EuroJournals Publishing, Inc.
* Cohen, W.M. and Klepper, S, (1996). A reprise of size and R&D. The Economic Journal, vol.106, No.43, p.925-951
* David B. Audretsch and Julie Ann Elston (2000). Does Firm Size Matter? Evidence on the Impact of Liquidity Constraint on Firm Investment Behavior in Germany. HWWA DISCUSSION PAPER 113,
* Davidson, H.William (1980). The Location of Foreign Direct Investment Activity. Country Characteristics and Experience Effects, Journal of International Business Studies, 11 (2), pp. 9 – 22
* Desai, M. A., C. F. FoleyAxarloglou, Kostas (2005). What Attracts Foreign Direct Investment Inflows in the United States?The International Trade Journal. volume XIX,No.3. Fall
* Devereux, M.P. and R. Griffith (1998). Taxes and the location of production: evidence from a panel of US multinationals.Journal of Public Economics, 68(3), 335-367
* Devereux, Michael P., and Rachel Griffith.(2003). Evaluating Tax Policy for Location Decisions. International Tax and Public Finance. 10(2): 107–26.
* De Mooij, Ruud and SjefEderveen (2003). Taxation and Foreign Direct Investment. A Synthesis of Empirical Research. International Tax and Public Finance.10. pp. 673-693.
* Devereux, Michael P./Griffith, Rachel (1999). The Taxation of Discrete Investment Choices − Revision 2, IFS Working Paper Series No. W98/16.
* Doms, M. and Jensen, B.J. (1998). Comparing wages, skills and productivity between domestically and foreign-owned manufacturing establishments in the United States, in R.E. Baldwin, R.E. Lipsey and J.D.Richardson (eds.), Geography and Ownership as Bases for Economic Accounting, The University of Chicago Press, Chicago.
* Dr. Chandan Lal Rohra, Mohammad SalihMemon, and Dr. Mohammad AslamMemon,(2009). Impact of Taxation on Financial Services Business Location Decisions inPakistan. Australian Journal of Basic and Applied Sciences, 3(4): 4175-4181.
* Devereux.M and Schiantarelli.F (1989). Investment, financial factors and cash flow: Evidence from UK panel data.
* De Mooij, Ruud A. &SjefEderveen, (Nov., 2001). Taxation and foreign direct Investment. CPB Discussion Paper, No.003.
* Dreher, Axel (2005). The Influence of Globalization on Taxes and Social Policy – an Empirical Analysis for OECD Countries, January.
* Djankov, Simeon, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer. (2002). The Regulation of Entry. Quarterly Journal of Economics, 117(1): 1-37.
* Daniel Drebles ;The Impact of Corporate Taxes on Investment An Explanatory Empirical Analysis for Interested Practitioners;Discussion Paper No. 12-040.
* Dr. S. L.Tulasi Devi, Prof. V. V. L. N. Rao. Investment Analysis in Fixed Assets. International Journal of Humanities and Applied Sciences (IJHAS) Vol. 1 No. 1
* Entrepreneurship Simeon Djankov, Tim Ganser, CaraleeMcLiesh, Rita Ramalho and Andrei Shleifer: The Effect of Corporate Taxes on Investment and Reviewed work(s):Source: American Economic Journal: Macroeconomics, Vol. 2, No. 3 (July 2010), pp. 31-64Published by: American Economic Association Stable.
* European Commission (1992). Report of the Committee of Independent Experts on Company Taxation. European Commission (2001). Company Taxation in the Internal Market.
* Fishman, A. and Rob, R, (1999). The size of firms and R&D investment. International Economic Review, vol.40, N4, p.915-931.
* Fazzari, Steven, and Bruce Petersen. Working capital and fixed investment. New evidence on financing constraints. RAND Journal of Economics. 1993. 328-342.
* FIAS, (1999) Kingdom of Thailand: A Review of Investment Incentives. World Bank Group, Washington, D.C.
* Fullerton, Don (1984). Which Effective Tax Rate in National Tax Journal. Vol. 37, pp. 23 – 41.
* Feldstein, Martin and Michael Rothschild (1974) Towards An Economic Theory of Replacement Investment Econometrica, 42: 393-423.
* Feldstein, Martin. (1982). Inflation, tax rules, and investment. Econometrica 50:825-62
* Gordon, Roger H. and James R. Hines, Jr. (2002). International Taxation in Alan J. Auerbach and Martin Feldstein (eds.), Handbook of Public Economics Volume IV. New York: Elsevier.
* Gugl, Elisabeth and George R. Zodrow (forthcoming).Tax Competition and Local Tax Incentives.Proceedings of the Ninety-Sixth Annual Conference on Taxation. Washington DC: National Tax Association.
* Gilchrist, Simon, and Charles Himmelberg, (1992). Evidence on the Role of Cash Flow in Reduced Form Investment Equations. Working Paper, Board of Governors of the Federal Reserve System
* Gordon, Robert J., and Stephen R. King. (1982). The output cost of disinflation in traditional and vector autoregressive models. BrookingsPapers on Economic Activity 13(1): 205-42.
* Grubert, Harry and Slemrod, Joel.The effect of taxes on investment and income shifting to Puerto Rico.Review of Economics and Statistics, 1998, 80, pp. 365–373.
* Grubert, H. and J. Mutti (1996). Do taxes influence where US multinational corporations invest? paper presented at TAPES conference Amsterdam.
* Ghosal, V. and Loungani, P, (1996).Firm size and the impact of profit-margin uncertainty on investment: Do financing constraints play a role ? International Finance Discussion Papers, N°55.
* Hassett, Kevin A, and AparnaMathur. (2006). Taxes and Wages. American Enterprise Institute for Public Policy Research Working Paper 128.
* Hajkova, Dana, Nicoletti, Giuseppe, Vartia, Laura and Yoo, Kwang-YeolYoo (2006), Taxation. Business Environment and FDI location in OECD countries. Economics Department. Working Paper. no.502. OECD
* Hafiz A. Pasha and Mahnaz Fatima Reviewed work(s):Source: Pakistan Economic and Social Review; macro trends in corporate profitability in pakistan Vol. 36, No. 2 (Winter 1998), pp. 225-242Published by: Department of Economics, University of the Punjab.
* Hubbard, R.G. (1998). Capital market imperfections and investment. Journal of Economic Literature 36. 193-225.
* Hall, Robert E., and Dale W. Jorgenson. 1967. Tax Policy and Investment Behavior. American Economic Review, 57(3): 391–414.
* Hubbard. R. Glenn. Investment under Uncertainty (1994): Keeping Literature Vol 32, 1816-1831.
* Hamburgisches Welt-Wirtschafts-Archiv (HWWA), (2000). Hamburg Institute of International Economics ,ISSN 1616-4814.
* Hirschey, M. (2003) Tech Stock Valuation: Investor Psychology and Economic Analysis. San Diego, CA:Academic Press.Moeller, S.B., Schlingemann, F.P. and Stulz, RM.(2005). Wealth destruction on a massive scale? A study of acquiring-firm returns in the recent merger wave. Journal of Finance, 60, forthcoming.
* Haufler, Andreas and Schjelderup, Guttorm (2000). Corporate Tax Systems and Cross-country Profit Shifting.Oxford Economic Papers, 52, pp. 306– 325.
* Hsieh, Ch. and Parker, J. (2002) Taxes and growth in a financially underdeveloped country: evidence from the Chilean investment boom, mimeo, Princeton University.
* Heckmeyer, J., and Lars Feld, (2009). FDI and Taxation: A Meta Study.CESifo Working Paper 2540.
* Hart, A.G. Anticipations. Uncertainty and Dynamic Planning
* Santosh Kumar Das.An Analysis of Investment in the registered manufacturing sector in INDIA.Paper for the Indian Econometric Society Conference.
* Jonathan B. Cohn. (January 31,2011)Corporate taxes and investment: The cash flow Channel. University of Texas at Austin, Red McCombs School of Business.
* Jiang Tianyi. Firm Size and Information Technology Investment: Beyond Simple Averages. ICIS 2003 Proceedings. pp80.
* James, Sebastian, and Stefan Van Parys,( 2009).Investment Climate and the Effectiveness of Tax Incentives. World Bank Group.
* Jens Arnold CyrilleSchwellnus; Do Corporate Taxes Reduce Productivity and Investment at the Firm Level? Cross-CountryEvidence from the Amadeus Dataset: CEPII, Working Paper No 2008 – 19
* Jones, Ronald W.International Capital Movements and the Theory of Tariffs and Trade. Quarterly Journal of Economics, February 1%7, 1-38.
* Kadapakkam P et al. (1998), The impact of cash flows and firm size on Investment: The International evidence. Journal of Banking and Finance. Vol.22. Issue (3). pp. 293-320.
* Krishna B. Kumar, Raghuram G. Rajan& Luigi Zingales (1999). what determines firms’size? National bureau of Economic Research.
* Meyer, J., and Kuh, E., (1957) The Investment Decision, Harvard
* Kanbur, R. and M. Keen, (1993), Jeux sans frontiers: Tax competition and tax coordination when countries differ in size, American Economic Review 83, 877-892.
* Kippenberg, Johannes (2001), IStR-Länderbericht Mai 2001 in InternationalsSteuerrecht, Vol. 10, Issue 9, p. 1.
* Kemp, Murray C. The Gains from International Trade and Investment: A Neo-Heckscher-Ohlin Approach. American Economic Review, September 1966, 778- 799.
* Krishna B. Kumar, RaghuramG.Rajan Luigi Zingales(July 1999) ; national bureau of economic research 1050 Massachusetts Avenue Cambridge, MA 02138 Working Paper
* Kremer, Michael. (1993).The 0-Ring Theory of Economic Development. The Quarterly Journal of Economics, August 1993, 551-575.
* La Porta, R., Florencio, Lopez De Silanes, Andrei Shleifer, and Robert Vishny 1997a, The Legal Determinants of External Finance. Journal of Finance, 52,113 1-1150.
* Rosen, Sherwin. (1982). Authority, Control, and the Distribution of Earnings. Bell Journal of Economics, Autumn 1982, 3 11-323.
* Robert J. Gordon, John Veitch : Fixed Investment in the American Business Cycle, 1919-83; The American Business Cycle: Continuity and Change; Volume ISBN: 0-226-30452-3.
* Robert E.Hall and Dale W. Joregenson . Tax Policy and Investment Behaviors;
* Robert A. Connolly and Mark Hirschey: Firm size and the effect of R&D on Tobin's qlUNCKenan-Flagler Business School, University of North Carolina-Chapel Hill, CB3490, McColl Building, Chapel Hill, NC 27599-3490, USA. 2School of Business, University of Kansas, 1300 Sunnyside Avenue, Lawrence, KS 66045-2003,. USA.
* LUCAS, ROBERT E., JR. (1978). On the Size Distribution of Business Firms.Bell Journal of Economics, vol 9, 508-523.
* Lim D.Fiscal(1983), Incentives and Direct Foreign Investment in Less Developed Countries. Journal of Development Studies, 19(2),
* Luxembourg. European Commission (1997). Towards tax co-ordination in the European Union: A package to tackle harmful tax competition, COM(97), 495 final. European Commission (1998), Conclusions of the ECOFIN Council meeting on 1December 1997 concerning taxation policy, Official Journal of the European Communities C2, 6/1/98, 16.
* Michael A. Salinger, Lawrence H. Summers (September 1981).Tax Reform and Corporate Investment. National Bureau of Economic Research, Working Paper No. 757
* Mr. A. Nnadi Matthias, Mrs. Meg Akpomi, (2008).The Effect of Taxes on Dividend Policy of Banks in Nigeria.International Research Journal of Finance and Economics.Issue 19, pp.1450-2887.
* Mintz, Jack M. (1990). Corporate Tax Holidays and Investment. The World Bank Economic Review, 4, Washington, D.C.
* Mody, A., Srinivasan, K. (1998). Japanese and U.S. Firms as Foreign Investors: Do they march to the same tune? Canadian Journal of Economics, vol.31.n.4, pp.778-799
* Magnus Blomstrom, Robert E.Lipsey (December 1986). Firm size and foreign direct investment”, Working Paper No. 2092, national bureau of economic research, 1050 Massachusetts Avenue, Cambridge, MA 02138,
* Markusen, J.R., E.R. Morey and N.D. Olewiler, (1995). Competition in regional environmental policies when plant locations are endogenous, Journal of Public Economics 56, 55-57
* Mintz, Jack M. (1995). Tax Holidays and Investment in Anwar Shah (ed.), Fiscal Incentives for Investment and Innovation. Oxford: Oxford University Press, for the World Bank Wilson, John D. (1999),Theories of tax competition,National Tax Journal, 52:2, pp. 269-304.
* Oliner, Stephen, and Glenn Rudebush (1992). The Transmission of Monetary Policy to Small and Large Firms, Working Paper, Board of Governors of the Federal Reserve System,
* Perez-Quiros, G. and A. Timmermann (2000). Firm Size and Cyclical Variations in Stock Returns, Journal of Finance, 55(3), 1229-62.
* Phillips, B.D.(1991). The increasing role of small firms in the high-technology sector: evidence from the 1980s. Business Economics 26, 40–47.
* Petersen, Mitchell A. and Raghuram G. Rajan.(1992). The Benefits of Firm-Creditor
* Relationships: Evidence from Small Business Data. University of Chicago Working Paper #362.
* Roubini, I., and J. Sachs. Government Spending and Budget Deficits in the Industrial Countries. Economic Policy, 4(8), 1989, 99–132.
* Rauh, J. (2006). Investment and Financing Constraints: Evidence from the Funding of Corporate Pension Plans. Journal of Finance 61, 33-71.
* Root F. and Ahmed A (1978). The Influence of Policy Instruments on Manufacturing Direct Foreign Investment in developing Countries. Journal of International Business Studies, 9(3)
* Rajan, r. and l. Zingales, (1998a). Financial Dependence and Growth. The American Economic Review 88: 559-586.
* Schneider, Dieter (1992). Investition, Finanzierung und Besteuerung, 7th ed.
* See Wells, Louis T., Nancy J. Allen, Jacques Morisset, and NedaPirnia, (2001). Using Tax Incentives to Compete for Foreign Investment—Are they Worth the Costs? International Finance Corporation and World Bank, Foreign Investment Advisory Service (FIAS).
* Samuelson, Paul A. (1964). Tax Deductibility of Economic Depreciation to Insure Invariant Valuations, in: Journal of Political Economy, Vol. 72, pp. 604 – 606.
* Shah, A. (1995). Fiscal Incentives for Investment and Innovation, Oxford
* Saas, Magdolna (2003), Competitiveness and Economic Policies related to foreign direct investment, Ministry of Finance,
* Stiglitz, Joseph and Andrew Weiss, (1981) Credit Rationing in Markets with Imperfect Information. American Economic Review 71, 393-410.
* Shah A. and J.Toye (1978). Fiscal Incentives for Firms in Some Developing Countries: Survey and Critique, edited by J. Toye, Taxation and Economic Development, London: Fran Cass,
* Serven, L. and Solimano, A. (1993). Private investment and macroeconomic investment: a survey, in Striving for Growth after Adjustment: The Role of Capital Formation (Eds) L. Serven and A. Solimano, The World Bank, Washington D.C, pp. 11–30.
* Trandel, G.A., (1994) Interstate commodity tax differentials and the distribution of residents, Jornal of public Economics 53, 435-457.
* VivekGoshal and ParkashLoungani(1997). Firm size and the impact of profit margin uncertainty on investment: Do finance constraints play a role? Board of Governors of the Federal Reserve System International Finance Discussion paper.
* Wilson, J.D. (1991). Tax competition with interregional differences in factor endowments, Regional Science and Urban Economics 21, 423-451.
* Wilson, J. (1999). Theories of tax competition, National Tax Journal 52, 269-304. Ruding Committee (1992), Report of the Committee of Independent Experts on Company Taxation, Office for Official Publications of the European Communities.
* Swenson, D. (1994). The impact of US tax reform on foreign direct investment in the United States, Journal of Public Economics, 54, 243-266.