Geographic distance and tax fundamentals: An empirical analysis of location choice of Japanese firms’ outbound mergers and acquisitions

The deterrent effect of geographic distance on international expansion has been extensively examined in extant literature; however, little is known about whether tax-related firm-level characteristics could moderate the deterrent effect although both merger and acquisition (M&A) location decisions and tax-related decisions involve considerable managerial judgments. Results using data on Japanese firms’ outbound M&A from 2010 to 2020 after Japan shifted from a worldwide tax system to a territorial tax system show that the deterrent effect of geographic distance is moderated by high tax avoidance, use of a tax consolidation regime, and a high level of deferred tax asset (DTA) balance. Additionally, we find that the 2017 Tax Reform on Japanese controlled foreign company (CFC) rules reduced the moderating effect of use of a consolidation regime, whereas it enhanced the moderating effect of a high level of DTA balance. These results call for a radical change in further research on various distances to incorporate insight from a tax perspective.