Planning Through Competitive Threats: Incumbent Firm Tax Responses to Sharing Economy Disruption
Abstract
Using the setting of the sharing economy (SE), I study whether incumbent firms increase tax planning in response to disruptive competitive threats, where cash needs are a primary mechanism. Due to their innovative business models, SE firms such as Airbnb and Uber pose substantial competitive threats to incumbent firms. Tax planning represents a competitive response available to incumbent firms to generate cash needed to combat these threats without derailing investment in current operations. I find that following key public events that reflect the emergence of SE competitive threats, incumbent firms significantly increase their cash tax planning, and that this tax planning is motivated by cash needs. Further tests suggest that the additional tax planning is not more aggressive and decreases in tax volatility. Finally, I provide preliminary evidence that where opportunities exist, some firms use non-income tax strategies to reduce cash tax outlays. Overall, these results suggest that incumbent firms respond to emerging competitive threats using tax strategies that increase cash tax savings. My study provides insight into the tax-related consequences of disruptive competitive threats from firms with innovative business models.
Description
Keywords
Competitive threats, tax planning, disruption, sharing economy