|Author Name||HOSONO Kaoru (Gakushuin University) / HOTEI Masaki (Daito Bunka University) / MIYAKAWA Daisuke (Hitotsubashi University)|
|Creation Date/NO.||March 2017 17-E-050|
|Research Project||Microeconometric Analysis of Firm Growth|
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First draft: March 2017
Using the pro forma standard taxation system introduced in Japan on April 1, 2004 as a natural experiment, we empirically examine how firms reacted to this exogenous institutional change, which burdened all firms holding stated capital of larger than 100 million yen with additional tax payments. Then, we determine whether such a reaction (if any) systematically resulted in firm growth. Our results are as follows. First, firms that originally held capital above the threshold became more likely to reduce their capital to the threshold level, or below, after the announcement of the new tax system. Second, firms that exhibit losses, hold smaller assets, have lower liquidity, and/or would benefit more from a tax point of view by reducing their capital were more likely to do so. Third, firms that reduced their capital showed a higher exit rate and ex-post lower growth in size, as measured by total and tangible assets, number of employees, and sales. Quantitatively, firms that reduced their capital decreased their assets, employment, and sales by 15%, 11%, and 4%, respectively, on average, within two years of the capital reduction, as compared with those that did not. Fourth, while the debt-to-total assets ratio of firms that reduced their capital did not change in comparison with firms that did not do so, the former did show a relative increase in the share of total assets made up of liquid assets. These results imply that the policy-induced capital reduction had substantial negative impacts on firm growth, and resulted in firms changing the balance of their asset holdings in favor of liquid assets.
(Revised) This study exploits the introduction of a new corporate tax in Japan that exempts from taxation firms whose stated capital is at (or below) a certain threshold to examine how firms react to a size-dependent tax policy associated with financial activities. Using a firm-level dataset, we find that firms with lower labor productivity, a positive potential tax benefit, and smaller stated capital are more likely to reduce their stated capital to (or below) the threshold. We further find that capital reduction results in lower ex-post growth in assets, sales, and debt, suggesting capital reduction leads to tighter financial constraints. The interaction of a finance-based size-dependent tax policy and financial constraints can deter firm growth.
*We revised this paper using the dataset provided by Tokyo Shoko Research Ltd.(TSR) in stead of the Basic Survey of Japanese Business Structure and Activities (BSJBSA) published by METI we used in the first version.