Mihir A. Desai

Professor of Law

Mizuho Financial Group Professor of Finance, Harvard Business School

Baker Library 265

617-495-6693

Assistant: Stephen Wagner / 617-496-2036

Biography

Mihir A. Desai is the Mizuho Financial Group Professor of Finance, Senior Associate Dean for Planning and University Affairs, and the Chair of Doctoral Programs at Harvard Business School. He received his Ph.D. in political economy from Harvard University; his MBA as a Baker Scholar from Harvard Business School; and a bachelors degree in history and economics from Brown University. In 1994, he was a Fulbright Scholar to India. Professor Desai's areas of expertise include tax policy, international finance and corporate finance. His academic publications have appeared in leading economics, finance and public economics journals. His work has emphasized the appropriate design of tax policy in a globalized setting, the links between corporate governance and taxation, and the internal capital markets of multinational firms. His research has been cited in The Economist, BusinessWeek, The New York Times, and several other publications. He is also the author of International Finance: A Casebook (New York: John Wiley & Sons, 2006) which features his many case studies on international corporate finance. He is a Research Associate in the National Bureau of Economic Research's Public Economics and Corporate Finance Programs, and is the co-director of the NBER's India program. He is also on the Advisory Board of the International Tax Policy Forum. Professor Desai teaches a second-year elective on International Financial Management and he co-teaches Public Economics (EC 1410) at Harvard College. He received the Student Association Award for teaching excellence from the HBS Class of 2001. His professional experiences include working at CS First Boston, McKinsey & Co., and advising a number of firms and governmental organizations.

Areas of Interest

Mihir A. Desai, The Incentive Bubble, 90 Harv. Bus. Rev., no. 3, Mar. 2012, at 124.
Categories:
Banking & Finance
Sub-Categories:
Financial Markets & Institutions
Type: Article
Abstract
The past three decades have seen American capitalism quietly transformed by a single, powerful idea—that financial markets are a suitable tool for measuring performance and structuring compensation. Stock instruments for managers, high-powered incentive contracts for investors, and the rise of alternative assets have dramatically altered the nature and level of incentives and rewards in our society, on both sides of the capital market. These changes have contributed significantly to the twin crises of modern American capitalism: repeated governance failures, which lead many to question the stewardship abilities of American managers and investors, and rising income inequality. When risk is repeatedly mispriced because investors enjoy skewed incentive schemes, financial capital is being misallocated. When managers undertake unwise investments or mergers in order to meet expectations that will trigger large compensation packages, real capital is being misallocated. And when relative compensation is as distorted as it has been by the financial-incentive bubble over the past several decades, one can only assume that human capital is being misallocated, to a disturbing degree. Awakening our monitors to their responsibilities and to the flaws of market-based compensation provides the best hope for correcting these imbalances and strengthening the U.S. economy for the challenges of this century.
Mihir A. Desai, The Decentering of the Global Firm, 32 World Econ. 1271 (2009).
Categories:
International, Foreign & Comparative Law
Sub-Categories:
Global Lawyering
,
International Monetary Systems
Type: Article
Pol Antras, Mihir A. Desai & C. Fritz Foley, Multinational Firms, FDI Flows, and Imperfect Capital Markets, 124 Q.J. Econ. 1171 (2009).
Categories:
Banking & Finance
Sub-Categories:
Economics
,
Contracts
,
Finance
Type: Article
Abstract
This paper examines how costly financial contracting and weak investor protection influence the cross-border operational, financing, and investment decisions of firms. We develop a model in which product developers can play a useful role in monitoring the deployment of their technology abroad. The analysis demonstrates that when firms want to exploit technologies abroad, multinational firm (MNC) activity and foreign direct investment (FDI) flows arise endogenously when monitoring is nonverifiable and financial frictions exist. The mechanism generating MNC activity is not the risk of technological expropriation by local partners but the demands of external funders who require MNC participation to ensure value maximization by local entrepreneurs. The model demonstrates that weak investor protections limit the scale of MNC activity, increase the reliance on FDI flows, and alter the decision to deploy technology through FDI as opposed to arm's length technology transfers. Several distinctive predictions for the impact of weak investor protection on MNC activity and FDI flows are tested and confirmed using firm-level data.
Mihir A. Desai, The Wisdom of Finance: Discovering Humanity in the World of Risk and Return (Houghton Mifflin Harcourt forthcoming May 2017).
Categories:
Banking & Finance
,
Corporate Law & Securities
Sub-Categories:
Finance
,
Risk Regulation
,
Corporate Governance
Type: Book
Abstract
"The Wisdom of Finance takes well-known financial concepts and applies them to our most pressing life issues. The book is philosophical in its approach, but Desai's thesis is peppered with real-life examples of how financial types can and should see the world around them." --Publisher
Mihir A. Desai, C. Fritz Foley & James R. Hines Jr., Trade Credit and Taxes, 98 Rev. Econ. and Stat. 132 (2016).
Categories:
Taxation
Sub-Categories:
Tax Policy
,
Taxation - Corporate
,
Taxation - International
Type: Article
Abstract
This paper analyzes the extent to which tax differences affect the use of trade credit. U.S.-owned affiliates in low-tax countries use trade credit to lend, whereas those in high-tax countries use trade credit to borrow: 10% lower local tax rates are associated with net trade credit positions that are 1.4% higher as a fraction of sales. The use of trade credit to get capital out of low-tax, low-return environments is also illustrated by the temporary repatriation tax holiday in 2005, which was used most intensively by affiliates with positive net trade credit positions.
Mihir A. Desai & Dhammika Dharmapala, Interest Deductions in a Multijurisdictional World, 68 Nat'l. Tax J. 653 (2015).
Categories:
Taxation
Sub-Categories:
Tax Policy
Type: Article
Abstract
This paper proposes and evaluates alternative methods for addressing the tax treatment of interest expenses in a multijurisdictional setting. The differential deductibility of debt entailed by various current tax law provisions leads to potential distortions in the patterns of asset ownership across MNCs and various proposed solutions have significant limitations. We suggest alternative regimes - a worldwide debt cap (WDC) and a net financing deduction (NFD) - to address the ownership distortions that we highlight along with other well-established problems of income-shifting through debt. These alternative regimes are extensions to a multinational setting of two general approaches to the neutral treatment of interest expenses - the CBIT (comprehensive business income tax) and ACC (allowance for corporate capital). While these regimes provide solutions to ownership distortions and to problems of "base erosion and profit shifting," they have the potential disadvantage of restricting other policy parameters.
Mihir A. Desai, A Better Way to Tax U.S. Businesses, 90 Harv. Bus. Rev. 134 (2012).
Categories:
Taxation
Sub-Categories:
Tax Policy
,
Taxation - Corporate
Type: Article
Abstract
High rates and perverse incentives are pushing investments out of America. But a handful of changes could transform the U.S. tax system from an obstacle into an asset.
Mihir A. Desai, Fritz C. Foley & James R. Hines Jr., Tax Policy and the Efficiency of U.S. Direct Investment Abroad, 64 Nat'l. Tax J. 1055 (2011).
Categories:
Taxation
Sub-Categories:
Tax Policy
Type: Article
Abstract
Deferral of U.S. taxes on foreign source income is commonly characterized as a subsidy to foreign investment, as reflected in its inclusion among "tax expenditures" and occasional calls for its repeal. This paper analyzes the extent to which tax deferral and other policies inefficiently subsidize U.S. direct investment abroad. Investments are dynamically inefficient if they consistently generate less in returns to investors than they absorb in new investment funds. From 1982-2010, repatriated earnings from foreign affiliates exceeded net capital investments by $1.1 trillion in 2010 dollars, and from 1950-2010, repatriated earnings and net interest from foreign affiliates exceeded net equity investments and loans by $2.1 trillion in 2010 dollars. By either measure, cash flows received from abroad exceeded 160 percent of net investments, implying that foreign investment over these periods was dynamically efficient.
Mihir A. Desai & Li Jin, Institutional Tax Clienteles and Payout Policy, 100 J. Fin. Econ. 68 (2011).
Categories:
Corporate Law & Securities
,
Taxation
Sub-Categories:
Shareholders
,
Taxation - Corporate
Type: Article
Abstract
This paper employs heterogeneity in institutional shareholder tax characteristics to identify the relation between firm payout policy and tax incentives. Analysis of a panel of firms matched with the tax characteristics of the clients of their institutional shareholders indicates that "dividend-averse" institutions are significantly less likely to hold shares in firms with larger dividend payouts. This relation between the tax preferences of institutional shareholders and firm payout policy may reflect dividend-averse institutions gravitating towards low dividend paying firms or managers adapting their payout policies to the interests of their institutional shareholders. Evidence is provided that both effects are operative. Plausibly exogenous changes in payout policy result in shifting institutional ownership patterns. Similarly, exogenous changes in the tax cost of institutional investors receiving dividends results in changes in firm dividend policy. (C) 2010 Elsevier B.V. All rights reserved.
Mihir A. Desai & Dhammika Dharmapala, Dividend Taxes and International Portfolio Choice, 93 Rev. Econ. and Stat. 266 (2011).
Categories:
Taxation
Sub-Categories:
Tax Policy
Type: Article
Abstract
This paper investigates how dividend taxes influence portfolio choices, using the response to the distinctive treatment of a subset of foreign dividends in the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003. An open-economy after-tax capital asset pricing model is used to derive the hypothesis that JGTRRA should lead to a portfolio reallocation by U.S. investors toward equities in tax-favored countries. A difference-in-difference analysis that compares U.S. equity holdings in affected and unaffected countries finds a substantial portfolio reallocation toward the former. This effect cannot be explained by several potential alternative hypotheses, including differential changes to the preferences of American investors, differential changes in investment opportunities, differential time trends in investment, changed tax evasion behavior, or changes in stock prices associated (or contemporaneous) with JGTRRA. © 2011 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Mihir A. Desai & Dhammika Dharmapala, Do Strong Fences Make Strong Neighbors?, 63 Nat'l. Tax J. 723 (2010).
Categories:
Taxation
Sub-Categories:
Tax Policy
Type: Article
Abstract
Many features of U.S. tax policy towards multinational firms-including the governing principle of capital export neutrality, the byzantine system of expense allocation, and anti-inversion legislation-reflect the intuition that building "strong fences" around the United States advances American interests. This paper examines the interaction of a strong fences policy with the increasingly important global markets for corporate residence, corporate control and corporate equities. These markets provide opportunities for entrepreneurs, managers, and investors to circumvent a strong fences policy. The paper provides simple descriptive evidence of the growing importance of these markets and considers the implications for U.S. tax policy.
Mihir A. Desai & Dhammika Dharmapala, Corporate Tax Avoidance and Firm Value, 91 Rev. Econ. & Stat. 537 (2009).
Categories:
Taxation
Sub-Categories:
Tax Policy
,
Taxation - Corporate
Type: Article
Abstract
Do corporate tax avoidance activities advance shareholder interests? This paper tests alternative theories of corporate tax avoidance using unexplained differences between income reported to capital markets and to tax authorities. OLS estimates indicate that the effect of tax avoidance on firm value is a function of firm governance, as predicted by an agency perspective on corporate tax avoidance. Instrumental variables estimates based on exogenous changes in tax regulations yield larger overall effects and reinforce the basic result, as do several robustness checks. The results suggest that the simple view of corporate tax avoidance as a transfer of resources from the state to shareholders is incomplete given the agency problems characterizing shareholder-manager relations.
Mihir A. Desai & Dhammika Dharmapala, Earnings Management, Corporate Tax Shelters, and Book-Tax Alignment, 62 Nat'l. Tax J. 169 (2009).
Categories:
Taxation
Sub-Categories:
Tax Policy
,
Taxation - Corporate
Type: Article
Abstract
This paper reviews recent evidence analyzing the link between earnings management and corporate tax avoidance and considers the implications for how policymakers should evaluate the financial reporting environment facing firms. A real-world tax shelter is dissected to illustrate how tax shelter products enable managers to manipulate reported earnings. A stylized example is developed that generalizes this view of corporate tax avoidance and empirical evidence consistent with this view is discussed. This view of corporate tax avoidance implies that shareholders and policymakers should question the rationale for distinct financial reports and that greater book-tax alignment may have mutually beneficial effects for investors and tax authorities.
Mihir A. Desai, C. Fritz Foley & James R. Hines, Jr., Domestic Effects of the Foreign Activities of US Multinationals, 1 Am. Econ. J. Econ. Pol'y 181 (2009).
Categories:
International, Foreign & Comparative Law
,
Banking & Finance
Sub-Categories:
Economics
,
International Trade
Type: Article
Abstract
Do firms investing abroad simultaneously reduce their domestic activity? This paper analyzes the relationship between the domestic and foreign operations of US manufacturing firms between 1982 and 2004 by instrumenting for changes in foreign operations with GDP growth rates of the foreign countries in which they invest. Estimates produced using this instrument indicate that 10 percent greater foreign investment is associated with 2.6 percent greater domestic investment, and 10 percent greater foreign employee compensation is associated with 3.7 percent greater domestic employee compensation. These results do not support the popular notion that expansions abroad reduce a firm's domestic activity, instead suggesting the opposite. (JEL F23, H25, L25)
Mihir A. Desai, Devesh Kapur, John McHale, & Keith Rogers, The Fiscal Impact of High-Skilled Emigration: Flows of Indians to the U.S., 88 J. Dev. Econ. 32 (2009).
Categories:
Disciplinary Perspectives & Law
Sub-Categories:
Law & Economics
,
Law & Social Change
Type: Article
Abstract
What are the fiscal consequences of high-skilled emigration for source countries? This paper develops methodologies for inferring these consequences and applies them to the recent sizable emigration of high-skilled workers from India to the U.S. This wave of emigration from India to the U.S. is shown to be unusually concentrated amongst the prime-age work force, the highly educated and high carriers. In order to calculate the fiscal losses associated with these emigrants, estimates of their counterfactual earnings distributions are generated using two distinct methods and integrated with a model of the Indian fiscal system to calculate fiscal consequences. Conservative estimates indicate that the annual net fiscal impact to India of high-skilled emigration to the U.S. is one-half of 1% of gross national income (or 2.5% of total fiscal revenues). The sensitivity of these results to the method of predicting counterfactual incomes and the implications of these estimates for other developing countries is discussed in detail. (C) 2008 Elsevier B.V. All rights reserved.
Mihir A. Desai, C. Fritz Foley & Kristin J. Forbes, Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Depreciations, 21 Rev. Fin. Stud. 2857 (2008).
Categories:
Banking & Finance
Sub-Categories:
Finance
,
Financial Markets & Institutions
,
Economics
Type: Article
Abstract
This article examines how financial constraints and product market exposures determine the response of multinational and local firms to sharp depreciations. U. S. multinational affiliates increase sales, assets, and investment significantly more than local firms during, and subsequent to, depreciations. Differing product market exposures do not explain these differences in performance. Instead, a differential ability to circumvent financial constraints is a significant determinant of the observed differences in investment responses. Multinational affiliates also access parent equity when local firms are most constrained. These results indicate another role for foreign direct investment in emerging markets-multinational affiliates expand economic activity during currency crises when local firms are most constrained.
Mihir A. Desai, The Finance Function in a Global Corporation, 86 Harv. Bus. Rev. 7 (2008).
Categories:
Banking & Finance
Sub-Categories:
Finance
Type: Article
Abstract
As corporations go global, capital markets open up within them, giving companies a powerful mechanism for arbitrage across national financial markets. But in managing their internal markets to build an advantage, CFOs must balance the opportunities with the challenges of operating in multiple environments.
Mihir A. Desai & James R. Hines, Jr., Market Reactions to Export Subsidies, 74 J. Int'l. Econ. 459 (2008).
Categories:
Banking & Finance
Sub-Categories:
Economics
Type: Article
Abstract
This paper analyzes the economic impact of export subsidies by investigating stock price reactions to a critical event in 1997. On November 18, 1997, the European Union announced its intention to file a complaint before the World Trade Organization (WTO), arguing that the United States provided American exporters illegal subsidies by permitting them to use Foreign Sales Corporations to exempt a fraction of export profits from taxation. Share prices of American exporters fell sharply on this news, and its implication that the WTO might force the United States to eliminate the subsidy, which happened in 2004. The share price declines were largest for exporters with high profit margins and those whose tax situations made the threatened export subsidy particularly valuable. This evidence suggests that export subsidies do not merely benefit foreign consumers, but also improve the profitability of exporters, particularly those earning rents in imperfectly competitive markets. (c) 2007 Elsevier B.V. All rights reserved.

Current Courses

Course Catalog View

Baker Library 265

617-495-6693

Assistant: Stephen Wagner / 617-496-2036