University of St.Gallen
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Business Taxation, Corporate Finance and Economic Performance

abstract This survey of recent research in corporate finance discusses how business taxes, subsidies as well as a country's institutional development affect several important decision margins of heterogeneous firms. We argue that innovative firms, as a result of agency problems between insiders and outside investors, are most frequently finance constrained. We discuss how profit taxes reduce investment of constrained firms by their effect on cash-flow, and of unconstrained firms by their effect on the user cost of capital. Moreover, tax reform as well as tax financed R&D subsidies can enhance aggregate investment, innovation and efficiency by implicitly redistributing profits towards constrained firms where capital earns the highest return. We argue that the corporate legal form improves firms' access to external funds. We then explain the firms' choice between venture capital and bank financing and discuss how business taxation can affect venture capital financing on both the extensive and intensive margins. Finally, we review theory and evidence on how corporate finance may shape a country's comparative advantage in innovative industries as well as aggregate labor market performance when part of firms are finance constrained.
   
type discussion paper (English)
   
keywords Financing constraints, innovation, business taxation, subsidies, entrepreneurial choice
   
date of appearance 3-5-2010
page(s) 57
review not reviewed
   
citation Keuschnigg, C., & Ribi, E. (2010). Business Taxation, Corporate Finance and Economic Performance.