Heterogeneous tax sensitivity of firm-level investments

This paper introduces a stylized theoretical framework to identify five different firm types depending on their financial situation and their ownership structure. The model explains the heterogeneous tax sensitivity of firm-level investments. The empirical analysis uses a large firm database for 24 countries allowing for a quantification of the regime-specific investment responses to taxation and identifies the partly latent firm types using a threshold estimation approach. We find important differences in the tax sensitivity of investment across firm-types for dividend as well as for corporate taxation. The impact of corporate taxation is substantially higher for entrepreneurial firms than for managerial firms. In contrast, dividend taxation has a comparable negative effect for cash-constrained managerial firms and entrepreneurial firms but no significant impact on their unconstrained counterparts. (C) 2020 Elsevier B.V. All rights reserved.