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Corporate Finance, Taxation and Economic Performance

version abrégée Difficulties in attracting external financing is a main constraint on investment of existing firms and the creation of new firms. However, finance constraints do not affect all firms equally. New innovative firms often have little own funds but large, profitable investment opportunities. These firms are most likely to be finance constrained. Large and mature com-panies, in contrast, tend to have lots of existing assets for collateral and may have already exhausted their investment needs. They are unlikely to be finance constrained but may suffer from other governance problems, such as empire building and misuse of corporate funds. As documented in a large body of empirical literature, different segments of the business sector are thus affected by financial frictions in different ways. Business taxation will therefore have different consequences for the financing and investment of different types of firms.
With few exceptions, existing literature in public economics has incorporated neither the theory of heterogeneous firms nor the modern theory of corporate finance. It is a unique re-search opportunity to merge heterogeneous firm theory and corporate finance to study public policy in market equilibrium. The project pursues five research questions which all make use of corporate finance theory. (i) What are the determinants of the firms' choices of legal form (corporate vs. non-corporate status)? Should the tax system discriminate among corporate and non-corporate firms? (ii) What are the differential effects of taxes on investment of financially constrained and unconstrained firms? Since these two types of firms systematically differ in their factor productivity and investment prospects, the effect of taxes on the composition of firms becomes important. (iii) What is the role of dividend taxation in the presence of firm heterogeneity? Constrained firms use all available own funds to finance investment, do not pay dividends and earn an excess return. In contrast, large mature firms with free cash-flow often prefer internal investments even if the return is below average, instead of paying out funds that could be more profitably invested elsewhere. In determining pay-out behavior, div-idend taxation should affect the efficiency of capital allocation and aggregate investment. (iv) What is the effect of labor taxation and job protection on investment of constrained firms, and how does this affect aggregate unemployment? (v) How do institutional quality and financial market development affect a country's comparative advantage in innovative sectors?
mot-clé corporate finance, corporate governance, corporate taxation, public policy, economic performance
type Projet de recherche appliquée
état courant
Départ du projet 2010
Fin du projet 2012
maître d'ouvrage Schweizerischer Nationalfonds zur Förderung der wissenschaftlichen Forschung, Forschungsprojekt Nr. 100014-129556/1
informations additionelles [ eEng/CEPR%20Public%20Policy%20Syposium%202011?opendocument International Workshop "Corporate Finance and Economic Performance"], University St, Gallen, INSEAD and ETH Zürich, St. Gallen, Dec. 17/18 2010

Research Papers:

Corporate Taxation, Debt Financing and Foreign Plant Ownership, Peter Egger, Wolfgang Eggert, Christin Keuschnigg, and Hannes Winner, European Economic Review 54, 2010, 96-107

Public Policy, Venture Capital and Entrepreneurial Finance,
Christian Keuschnigg, in: Douglas Cumming (ed.), Venture Capital. Investment Strategies, Structure, and Policies, The Robert Kolb Series in Finance, John Wiley, 2010, 525-552

New Research Papers:
Taxation and Incorporation, Peter Egger, Christian Keuschnigg and Hannes Winner, University of St. Gallen, April 29, 2011

Business Taxation, Corporate Finance and Economic Performance, Christian Keuschnigg and Evelyn Ribi, University of St. Gallen, April 2010

Innovation, Trade and Finance, Peter Egger and Christian Keuschnigg, University of St. Gallen, February 2011

Access to Credit and Comparative Advantage, Peter Egger and Christian Keuschnigg, University of St. Gallen, January 2011

Profit Taxation, Innovation and the Financing of Heterogeneous Firms, Christian Keuschnigg and Evelyn Ribi, University of St. Gallen, March 2011, CEPR DP 7626

Profit Taxation and Finance Constraints, Christian Keuschnigg and Evelyn Ribi, University of St. Gallen, April 2010, CEPR DP 7433, CESifo DP 2914

The Arm’s Length Principle and Distortions to Multinational Firm Organization, Christian Keuschnigg and Michael D. Devereux, University of St. Gallen and Oxford University Centre of Business Taxation, October 2010, CEPR DP 7375

Incorporation and Taxation: Theory and Firm-level Evidence,
Peter Egger, Christian Keuschnigg and Hannes Winner, University of St. Gallen, June 2009, CESifo DP. 2685
Contact Christian Keuschnigg