No. 252: Firm Restructuring at Regulatory Thresholds

This study investigates whether regulatory thresholds induce firm restructuring. Size thresholds are commonly used by standard setters to protect smaller firms from bureaucratic costs. This paper examines whether such threshold-based policies lead firm owners to disaggregate their activities into multiple smaller entities. Before turning to large-sample evidence, I conduct interviews with tax consultants who appear to assist firms in this kind of behaviour. Leveraging the exceptionally detailed data available around the German audit threshold, I show that owners just above the threshold are 6.4 percentage points more likely to be organized into multiple legal entities. Owners adjust their firm structures when crossing the threshold and exploit these disaggregated structures to stay below it.