Essays on Empirical Corporate Finance


May 2023

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This dissertation consists of three essays on empirical corporate finance. The first essay, titled “Climate Change Salience and Firm Investment,” is included in Chapter 1. I hypothesize that firms are more likely to make investments that reduce their CO2 emissions intensity if the threat of climate change is more salient. To test this, I examine mergers and acquisitions (M&A) in the US from 2012-2021 and exploit exogenous variation in exposure to abnormally warm temperatures. Conditional on an M&A occurring, if the acquiror experienced abnormally warm temperatures at its headquarters within 6 months prior to the deal’s announcement, then the target has 15% lower estimated CO2 emissions intensity in the full sample of deals. The effect increases to 29% among deals where the acquiror has above median CO2 emissions intensity, as these are the types of firms most exposed to climate change transition costs. This paper shows that firms exhibit a behavioral bias known as attribute substitution in their adjustment to climate change, since they make an estimate of the impact based on local temperatures, an easily accessible proxy, rather than the true determining factors. The second essay, titled “Tax Avoidance through Cross-Border Mergers and Acquisitions” and coauthored with Jean-Marie Meier, is included in Chapter 2. We investigate 13,307 cross-border, tax-haven mergers and acquisitions (M&A) from 1990 to 2017, totaling $4.1 trillion in deal value, or about 30% of total cross-border M&A volume. $2.4 of the $4.1 trillion is beyond what is predicted based on a gravity model with economic fundamentals. Tax-haven M&A result in $30.7 billion in recurring annual tax avoidance. To illustrate the magnitude, for a US firm with no prior cross-border, tax-haven M&A history, buying an Irish firm worth 5% of its total assets would result in an expected decline in its effective tax rate of 3.32 percentage points. For identification, we use a change in US tax law in 2004. Following haven acquisitions, firms are more likely to relocate their headquarters to havens. Our results document that tax avoidance through havens is a significant determinant of cross-border M&A. The third essay, titled “Improving the Measurement of Tax Residence: Implications for Research on Corporate Taxation” and coauthored with Jean-Marie Meier, is included in Chapter 3. We highlight an opportunity for improved measurement of a key data item in corporate tax research, a firm’s tax residence. Some countries define tax residence based on a firm’s location of incorporation, some on a firm’s location of headquarters, and some consider both locations. Because no firm-level tax residence database exists, studies typically apply a uniform assignment of either the location of incorporation, headquarters, or center of business activity. We use a novel algorithm that embeds the residency laws of 150 countries to accurately assign tax residence. We reassign the tax residence of a considerable fraction of firms relative to standard proxies, and provide evidence that reassignment significantly affects inferences. For instance, for cross-border mergers and acquisitions with a US acquiror, 16% of the deal value involves an acquiror that is reassigned. Moreover, reassigned firms are systematically different from other firms along several dimensions, including effective tax rates.



Economics, Finance