EconPol Working Paper Series

Cover of EconPol Working Paper 36

Ring-fencing Digital Corporations: Investor Reaction to the European Commission’s Digital Tax Proposals

Daniel Klein (University of Mannheim), Christopher A. Ludwig (EconPol Europe, ZEW Mannheim, University of Mannheim), Christoph Spengel (EconPol Europe, University of Mannheim, ZEW Mannheim)

In this working paper, Daniel Klein (University of Mannheim), Christopher A. Ludwig (EconPol Europe, ZEW Mannheim, University of Mannheim) and Christoph Spengel (EconPol Europe, University of Mannheim, ZEW Mannheim) study the effect of digital tax measures on firm value and find that expectations about ring-fencing digital tax measures impact firm values. An analysis of investor reaction to the European Commission’s proposals on the taxation of digital corporations reveals a significant abnormal capital market reaction of -0.692 percentage points. The investor reaction is more pronounced for firms that engage more actively in tax avoidance, have a higher profit shifting potential, and for those with higher exposure to the EU. The market value of digital and innovative corporations decreased by at least 52 billion euro in excess of the regular market movement during the event window. 

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Cover of EconPol Working Paper 35

The Political Economy of Multilateral Lending to European Regions

Zareh Asatryan (EconPol Europe, ZEW Mannheim), Annika Havlik (EconPol Europe, ZEW Mannheim, University of Mannheim)

European regions which have representatives on the board of directors at the European Investment Bank (EIB), the world’s largest multilateral lending and borrowing institution, are more likely to receive loans than those regions in Europe which aren’t represented. Researchers Zareh Asatryan (EconPol Europe, ZEW Mannheim) and Annika Havlik (EconPol Europe, ZEW Mannheim, University of Mannheim) collected information on the regions of origin of around 500 national representatives at the EIB’s Board of Directors (the decisive body for loan approvals) since its foundation in 1959. They found that a representative's appointment increases the probability of their sub-national region receiving a loan by 17 percentage points. This “home-bias" effect is particularly present in large loans financing infrastructure projects.

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Cover of EconPol Working Paper 34

The Social Costs of Side Trading

Andrea Attar, Thomas Mariotti, François Salanié (EconPol Europe; Toulouse School of Economics)

This working paper examines resource allocation under private information when the planner cannot prevent bilateral side trading between consumers and firms. Adverse selection and side trading severely restrict feasible trades: each marginal quantity must be fairly priced given the consumer types who purchase it. Authors Andrea Attar, Thomas Mariotti and François Salanié (EconPol Europe and Toulouse School of Economics) discuss the relevance of the results for insurance and financial markets.

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cover of EconPol Working Paper 33

What Drives Chinese Overseas M&A Investment? Evidence from Micro Data

Clemens Fuest, Felix Hugger, Samina Sultan, Jing Xing

In recent years Chinese foreign acquisitions have increased significantly, with Chinese investors are more likely to acquire larger firms, firms with lower levels of profitability and higher debt. This EconPol working paper from Clemens Fuest (EconPol Europe, ifo Institute, LMU), Felix Hugger (LMU), Samina Sultan (LMU) and Jing Xing (Shanghai Jiao Tong University) shows investors don’t seem to pay more for target firms with given characteristics, questioning the view that they are subsidized to outbid other investors. Policy initiatives like the Belt and Road Initiative and Made in China 2025 influence state-owned but not private Chinese investors. After acquisition by a Chinese company, targets exhibit lower growth in capital productivity, but a higher growth of employee compensation.

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Cover of EconPol Working Paper 32

Bond Exchange Offers or Collective Action Clauses?

Ulrich Hege, Pierre Mella-Barral

This paper by Ulrich Hege (Toulouse School of Economics) and Pierre Mella Barral (TBS Business School) examines two prominent approaches to design efficient mechanisms for debt renegotiation with dispersed bondholders: debt exchange offers that promise enhanced liquidation rights to a restricted number of tendering bondholders (favored under U.S. law), and collective action clauses that allow to alter core bond terms after a majority vote (favored under U.K. law). The authors use a dynamic contingent claims model with a debt overhang problem, where both hold-out and hold-in problems are present. They show that the former leads to a more efficient mitigation of the debt overhang problem than the latter. Dispersed debt is desirable, as exchange offers also achieve a larger and more efficient debt reduction relative to debt held by a single creditor.

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