Research

The value of a loss: The impact of restricting tax loss transfers. TRR 266 Accounting for Transparency Working Paper Series No. 128 (August 2023, Update December 2023); with E. Casi, B. Stage & J. Voget 

R&R at Journal of Accounting Research

This paper examines the economic consequences of anti-loss trafficking rules, which disallow the use of tax loss carry-forwards after a substantial change in ownership or activity. Using staggered changes to anti-loss trafficking rules across EU28 Member States and Norway from 1998 to 2019 in a stacked-cohort difference in difference design, we find that limiting the transfer of tax losses leads to a 22% decrease in the volume of mergers and acquisitions in targets that are more likely to have tax loss carry-forwards. M&A related to profitable targets are not affected, confirming the tax channel mechanism. We further study the broader economic effects of anti-loss trafficking rules: we observe decreases in birth and survival rates of young companies in response to stricter regulations and vice versa. Our findings further suggest that tighter (looser) anti-loss trafficking rules impair (increase) firms' return on assets, especially for R&D intensive firms that are more prone to loss-making in their life cycle. In line with this, a decrease in successful patent applications in case of tighter rules suggests that limiting the transferability of losses affects innovative activity. 

Do tax loss provisions distort venture capital funding of start-ups? ZEW Discussion Paper No. 21-008 (January 2021, Update November 2022)

I analyze whether anti-tax loss trafficking rules affect the funding of start-ups in Europe. I base my empirical analysis on a panel of VC-funded companies in the EU28 Member States from 1999 to 2014. These regulations disallow the use of loss carry-forwards after a substan-tial change in ownership or activity. This restriction could threaten accumulated loss carry-forwards of start-ups. Accounting for the increased risk and reduced return on their invest-ment, venture capital (VC) investors could reduce their funding. My findings suggest that strict anti-tax loss trafficking rules indeed impair VC funding. Especially companies in high-tech industries are affected.

Too much "skin in the game" ruins the game: Evidence from managerial capital gains taxes. ZEW Discussion Paper No. 23-028 (August 2023); with C. Yen

Co-investment, often seen as a remedy for agency problems, may incentivize managers to cater to own preferences. We provide evidence that mutual fund managers with considerable co-investment stakes alter risk-taking decisions to prioritize their own tax interests. By exploiting the enactment of the American Taxpayer Relief Act 2012 as an exogenous shock of managerial capital gains taxes, we observe that co-investing fund managers increase risk-taking by 8%. Specifically, these managers adjust their portfolios by investing in stocks with higher beta. The observed effect appears to be driven by agency incentives, particularly for funds with a more convex flow-performance relationship and for managers who have underperformed. Such tax-induced behavior is associated with negative fund performance. We highlight the role of co-investment in transmitting managerial tax shocks to mutual funds.

From corporate tax competition to global cooperation? Trends, prospects and effects on German family businesses. ZEW Discussion Paper No. 23-027 (July 2023); with K. Nicolay, C. Spengel & S. Wickel 

This study provides an overview of current political developments in the tax competition debate, emphasizing the consequences for large German family businesses. We analyze new tax competition trends in Europe and selected industrialized countries in recent years. Subsequently, we discuss various international tax policy counter-reactions, namely the Anti-Tax Avoidance Directive and country-by-country reporting on the European level as well as the OECD’s two-pillar project. We outline a potential shift in tax competition away from companies towards highly wealthy and highly qualified individuals. The implications of these developments on large German family businesses are emphasized, offering insights into the evolving landscape of tax competition.