The Effect of Income-Shifting Aggressiveness on Corporate Investment

Do firms balance tax and operating considerations when making investment decisions? We investigate whether income-shifting aggressiveness affects new investments and predict firms that aggressively shift income will choose affiliate-level investments driven less by local investment opportunities. We use affiliate-level data from multinational corporations to develop a firm specific measure of the sensitivity of reported profits to cross-border tax incentives. Results suggest firms with below-median income-shifting aggressiveness exhibit the typical positive relation between investment opportunities and investment level, but firms with above-median income-shifting aggressiveness exhibit no statistical relation. Our tests extend the literature on investment distortions by documenting that multinational corporations’ international tax considerations alter their tangible investment decisions.