Corporate Taxation, Income Shifting, and Behavioural Outcomes: Implications for Financial Decision-Making and Reporting

Abstract

This thesis consists of three essays that examine the effects of the 2017 U.S. Tax Cuts and Jobs Act (TCJA) on corporate behavior and outcomes, focusing on income shifting, investment decisions, and accounting reporting design. The TCJA, one of the largest tax reforms in U.S. history, fundamentally altered the U.S. tax system which transitioned from a worldwide to a territorial system. These essays provide empirical evidence as to how this landmark reform influenced corporate financial strategies, tax practices, and reporting behavior. Together, these essays contribute to the ongoing discussion on the effectiveness and impacts of the TCJA, shedding light on how tax reform influences corporate debt strategies, investment behavior and tax compliance. This thesis offers valuable insights for policymakers and academics interested in the intersection of tax policy, corporate governance, and financial decision-making. Chapter 1 documents the purpose and objectives of this research and provides an overview of each of the main sections of the thesis. Chapter 2 entitled “The impact of the Tax Cut Jobs Act and income shifting on the cost of bank loans”, investigates whether changes in income shifting incentives following the TCJA are associated with a shift in the cost of bank loans for U.S. multinational corporations (MNCs). The study finds that the TCJA reduced bank loan costs and altered the relationship between income shifting incentives and loan pricing, particularly in environments characterized by weak information transparency, lower IRS audit probability, stronger corporate governance, higher R&D investments, and greater liquidity. Chapter 3 entitled “The Tax Cuts and Jobs Act legislation and corporate behavioral outcomes”, examines the broader effects of the TCJA on corporate behavior, including changes in investment decisions, cash holdings, and payout policies for both U.S. MNCs and domestic firms. The findings reveal distinct post-TCJA patterns: U.S. MNCs reduced capital expenditures, increased cash reserves, and raised dividend payouts and share repurchases, while domestic firms primarily increased cash holdings and share repurchases. The study highlights the shift toward more domestic investment by MNCs and provides critical insights into how the TCJA reshaped corporate financial strategies. Chapter 4 entitled “Income-shifting arrangements of U.S. multinational corporations and accounting reporting design”, focuses on the role of XBRL (eXtensible Business Reporting Language) tags in reducing aggressive income-shifting practices among U.S. MNCs. Using a large sample of firm-year observations, the study demonstrates a significant negative association between income shifting and the design of accounting reports, as measured by the number of XBRL tags. This association is particularly pronounced for firms with tax haven subsidiaries, multiple offshore subsidiaries, and lower ESG scores. The results suggest that the adoption of XBRL reporting enhances the efficiency of IRS audits, thereby mitigating income-shifting incentives. Chapter 5 concludes the thesis and outlines directions for future research.