The Capacity to Be Aggressive: Structured Management and Profit Shifting Practices in the Firm

Abstract : This paper considers the effect of firm’s organizational capacity – proxied by structured management practices - on tax planning behavior of multinational firms (MNEs). Management practices improve productivity and hence should increase taxable corporate income of firms. However, higher adoption of management practices may also enable tax planning. Using a pooled cross-sectional dataset, we show that MNEs operating in low-tax countries exhibit a positive relationship between reported profits and structured management practices, while no discernible relationship exists for MNEs operating in high-tax countries. Using an event study design, we find that firms with more structured management are also more responsive to corporate tax rate changes. These patterns are consistent with the shifting of profits out of high-tax locations into low-tax locations. This adds a novel explanation for why some firms are more likely to engage in aggressive tax planning, with implications to the cost-benefit analysis of government-funded management upgrading projects.

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Corporate Purpose and Firm Ownership

Abstract : Analyzing data from approximately 1.5 million employees across 1,100 established public and private US companies, we find that the strength of employee beliefs about their firm’s purpose is lower in public companies. This difference is most pronounced within the salaried middle and hourly ranks, rather than senior executives. Among public companies, purpose becomes progressively lower with more concentrated shareholders, especially among firms with high hedge fund ownership. These patterns can be partly explained by differences in CEO backgrounds and compensation: public firms, particularly those with strong shareholders, choose outsider CEOs at higher rates and pay them more relative to their employees. Our analyses suggest that these results are not driven solely by sorting effects, but appear attributable in part to the impact that firm owners have on their employees. In summary, shareholders appear to influence the strength of corporate purpose deep within organizations via the leadership and corporate practices they enable at the top.

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Strategy and Structured Management

Abstract : We provide the first large-scale empirical evidence on the link between firm strategy and the uptake and performance of “structured” management practices. Working with the U.S. Census Bureau, we developed a novel measure of strategic commitment to flexibility versus efficiency at the production-unit level. Evidence from over 30,000 establishments in the U.S. manufacturing sector reveals that heretofore-unobserved process strategy decisions help explain variation in the adoption of structured management, even within the same firm. Performance of these practices is also contingent on the degree of strategy-practice alignment: plants that deviate from an empirically-derived measure of fit suffer significantly lower productivity. Among many possible drivers of misalignment, unionization and peer effects are associated with greater strategy-practice misalignment. These findings draw attention to critical contingencies that should inform measurement and research at a time of fast-growing interest among academics, practitioners, and government agencies.

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