STRATEGY AND BUSINESS ECONOMICS


Organizational capacity and profit shifting


DANIELA SCUR ASSISTANT PROFESSOR


Charles H. Dyson School of Applied Economics and Management


Cornell SC Johnson College of Business Cornell University


Journal of Public Economics, 238, October 2024 LINK TO PAPER


Co-authors • Daniela Scur


Assistant Professor, Charles H. Dyson School of Applied Economics


and Management, Cornell SC Johnson College of Business, Cornell University • Katarzyna Bilicka, Huntsman School of Business, Utah State University


Summary While productivity is clearly enhanced by sound managerial practices, profit-


ability measures such as return on assets can be clouded by strategic report- ing and accounting tactics. Te authors examine the relationship between good management practices and multinational enterprises’ (MNEs’) ability to engage in tax avoidance strategies, expanding on a well-established body of research linking effective management to higher productivity.


Prior research has mainly focused on the role of headquarters-level deci- sion-makers in driving aggressive accounting behavior. However, the authors argue that the capacity of local subsidiaries to carry out these strategies is equally critical and has been underexplored. By examining the interaction be- tween management quality and profit shifting, the study shifts attention to the active role that subsidiary-level organizational structures play in facilitating or hindering tax-motivated decision-making. Teir findings reveal that subsid- iaries with stronger organizational capacity report significantly lower profits when located in high-tax countries—suggesting a capacity to shift profits away from such jurisdictions. Tis behavior is not observed in low-tax settings, and the responsiveness to changes in tax rates is concentrated among firms with high-quality management. Te study concludes that while good management enhances productivity, it may also be instrumental in enabling legal but ag- gressive tax avoidance strategies, raising important implications for tax policy and corporate governance.


CONTENTS TO MAIN


| RESEARCH WITH IMPACT: CORNELL SC JOHNSON COLLEGE OF BUSINESS • 2024 EDITION


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