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Taxes, Theft, and Firm Performance

This paper examines the interaction between income diversion and firm performance. Using unique Russian banking transaction data, I identify 42,483 spacemen, fly-by-night firms created specifically for income diversion. Next, I build a direct measure of income diversion for 45,429 companies and show that it is negatively related to firm performance. Then, I identify the main reason for the observed effect as managerial diversion rather than tax evasion per se. Finally, I show that stricter tax enforcement can improve firm performance. A one standard deviation increase in tax enforcement corresponds to an increase in the annual revenue growth rate by 2.6%..Printed Journal

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