The effect of tax avoidance crackdown on corporate innovation

Qin Li, Ma, Mark (Shuai) and Terry Shevlin

Journal of Accounting and Economics, 2021, vol. 71, issue 2

Abstract: To constrain the use of intangible assets in tax-motivated state income shifting, many U.S. state governments adopted addback statutes. Addback statutes reduce the tax benefits that firms can gain from creating intangible assets such as patents. Using a sample of U.S. public firms, we examine the effect of addback statutes on corporate innovation behavior. First, the adoption of addback statutes leads to a 4.77 percentage point decrease in the number of patents and a 5.12 percentage point decrease in the number of patent citations. Second, the “disappearing patents” resulting from addback statutes have significant economic value. Third, after a state adopts an addback statute, a firm with material subsidiaries in that state assigns fewer patents to subsidiaries in zero-tax states, whereas the number of patents assigned to the other states does not change. Overall, our findings suggest that addback statutes impede corporate innovation.

Keywords: Addback statutes; Innovation; Tax avoidance crackdown; Tax-motivated income shifting (search for similar items in EconPapers)
JEL-codes: G30 H71 O30 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:71:y:2021:i:2:s0165410120300847

DOI: 10.1016/j.jacceco.2020.101382

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