Two researchers from the Naveen Jindal School of Management recently won the Best Paper in Corporate Finance Award from the Society for Financial Studies at its SFS Cavalcade North America 2023 conference.
Dr. Jean-Marie Meier, an assistant professor in the Finance and Managerial Economics Area; and Dr. Jake Smith, PhD’23 (Finance), who will soon take the role of financial economist at the Securities and Exchange Commission, won the award for their paper, “Improving the Measurement of Tax Residence: Implications for Research on Corporate Taxation.”
Countries either consider a firm’s location of incorporation, headquarters, or both when deciding whether the global legal parent entity of the firm is tax resident in a country, according to Meier.
“The United States, for instance, only considers the location of incorporation, while neighboring Mexico only considers the location of headquarters. In total, countries around the world follow five different approaches,” Meier said.
Prior academic research, Smith said, did not take this variation into account.
“Instead, it assumed that all countries considered in a study have the same rules,” he said. “This causes a problem for firms that have a different location of headquarters and incorporation, which applies to about five percent of large publicly listed firms worldwide. Consider, for instance, the S&P 500 company Norwegian Cruise Line Holdings (headquarters in the United States but incorporated and tax resident in Bermuda, according to Smith) or Brookfield Corp (headquartered in the United States but incorporated and tax resident in Canada, according to Smith).”
If an academic study only considers the location of headquarters, then it would misassign these two firms to the United States when they are tax resident in Bermuda and Canada, respectively, according to Smith.
The study by Meier and Smith measures tax residence by embedding the residence laws of 150 countries, trying to find a more precise measure for tax residence through an algorithm. The research also inserts tie-breaking provisions when a firm is claimed by two countries that have conflicting tax codes. The key contribution of their paper is a more precise measurement of firms’ tax residence, and, while this measurement is only important for about five percent of firms that have different locations of headquarters and incorporation, these firms are usually the most aggressive firms with regards to tax avoidance, so measuring these firms’ tax residence correctly is particularly important, according to the researchers.
“There is a better way to tax firms taking into account these different factors,” Meier said. “With the different country-level rules, the way it is done in prior research can be wrong and often results in companies not sharing the tax burden in a way many would think they should.”
“Examining questions related to corporate taxation by proxying for tax residence instead of actually accounting for all relevant tax laws can lead to wrong conclusions,” Smith said.
“This paper solves the tax residence measurement issue and also demonstrates the importance of tax residence,” he said. “The firms that are misclassified in prior work are among the most aggressive tax avoiders in the world. To understand where these companies pay tax and how they minimize their tax payments, one must first measure their tax residence correctly.”
For Meier, winning this award is gratifying.
“This is considered one of the top three finance conferences and we were up against many accomplished researchers,” he said. “This conference is also organized by an association that publishes one of the top three finance journals. This signals a quality in our work that is very encouraging.”
For Smith, it backs up the strong opportunities he received at UT Dallas as he heads into his new role. “It shows what kind of work you can be involved in,” he said. “Learning all the tax laws and how they are applied in practice was a challenge.”
Dr. Alejandro Rivera, an assistant professor in the Jindal School’s Finance and Managerial Economics Area, agreed that the award reflects strongly on the school.
“Cavalcade is an extremely competitive conference to get into, no doubt one of the three most prestigious ones in our field,” he said. “You can then imagine how much harder it is to get a Best Paper award, especially for a junior academic and a PhD student. It is something worth celebrating for all of us in the UTD community!”
