Inter-Temporal Income-Shifting for Investment Reasons : Evidence From Private Firms

This paper examines the level and efficiency of private firms' investments with respect to corporate tax cuts. Earlier research has focused mainly on public firms. Research into private firms is especially relevant since these companies tend to finance future growth through internal financing. Using a sample of 2,308 firm-year observations of private Spanish companies and a matched difference-in-differences analysis, our results show that private companies engaged in inter-temporal income-shifting to get additional tax savings. However, this is only observed in cash-constrained firms that increased their investments immediately after the tax reform. Additionally, we provide evidence that the investments made by such firms are not always efficient. This is in line with the idea that firms receiving cash windfalls do not necessarily use them wisely