Societal trust and corporate underinvestment

We extend prior literature by showing that societal trust is a significant determinant of corporate investment policy. Firms in countries with a higher level of societal trust are less prone to underinvestment. We posit that the association between trust and underinvestment relates to a reduction of financial constraints. However, when we split our sample using different proxies for the level of financial constraints, we document that trust has an additional effect on underinvestment beyond enhanced access to capital. Consistent with the view that trust and conventional forms of governance are substitutes, we demonstrate that the effect of trust on underinvestment is reduced for firms in countries with strong investor protection.     

Languages and corporate tax avoidance

Review of Accounting Studies - This paper examines the effect of languages on corporate tax avoidance. We hypothesize and find that managers of firms in countries with languages that grammatically...     

Banking deregulation and corporate tax avoidance

We investigate whether tax avoidance substitutes for external financing. We exploit interstate banking deregulation as a quasi-external shock to examine whether...     

Military experience and corporate tax avoidance

We find that managers with military experience pursue less tax avoidance than other managers and pay an estimated $1–$2 million more in corporate taxes per firm-year. These managers also undertake less aggressive tax planning strategies with smaller tax reserves and fewer tax havens. Although they leave tax money on the table, boards hiring these managers benefit from reductions in other gray areas in corporate reporting. The broad implications are as follows: for employee selection, boards can consider employees’ personal characteristics as a control mechanism when outputs are difficult to contract ex ante or measure ex post.     

Stock liquidity and corporate tax avoidance

We show that firms with higher stock liquidity engage less in extreme (i.e., overly aggressive or overly conservative) tax avoidance. The effect of stock liquidity on tax avoidance is economically meaningful and robust across alternative measures of tax avoidance and stock liquidity. The findings also hold after controlling for potential endogenous effects. We further document that the effect of stock liquidity on tax avoidance is amplified for firms with high proportions of activist shareholders and attenuated for firms with high levels of stock price informativeness. Overall, our findings suggest that stock liquidity mitigates extreme tax avoidance by enhancing shareholders’ monitoring over firm management.

     

Credit refinancing and corporate tax avoidance

This study examines the disciplining effects of credit markets on firms’ corporate tax avoidance strategies. We show that, during adverse credit market conditions, firms with refinancing needs prefer to limit the after-tax cash flow benefits of tax avoidance to regain access to traditionally risk-averse credit markets. Our results show that firms increase their cash effective tax rate by two percentage points when facing refinancing constraints, and this effect is more pronounced for firms with lower asset redeployability and higher default probability. However, corporate governance mechanisms mitigate the relationship between tax avoidance and credit refinancing. Moreover, we show that firms decrease their tax avoidance strategies while leaving their leverage and debt shield unchanged. Overall, our findings are consistent with the observation that credit markets put pressure on tax-avoiding firms and contribute to the policy debate on disciplining tax avoiders.     

Securities litigation and corporate tax avoidance

We examine whether litigation risk is systematically related to corporate tax avoidance. We find that the exogeneous reduction in the threat of securities class action litigation due to the 1999 ruling of the Ninth Circuit Court of Appeals effectively increases corporate tax avoidance, which is consistent with the notion that the threat of shareholder litigation plays a disciplinary role in curbing managerial rent extraction from tax avoidance activities. This finding is robust to alternative model specifications including two placebo tests and propensity score matching. We further find that labor union and alternative external governance mechanisms such as analyst coverage and institutional ownership mitigate this effect. Overall, our paper provides a significant contribution to the understanding of the relation between corporate governance and tax avoidance.     

Firm-level political sentiment and corporate tax avoidance

This paper examines how managers' tone on political issues in earnings conference calls relates to corporate tax avoidance. We find a positive relationship between managers' tone of using political linguistics and tax avoidance, while controlling for non-political tone. The relationship is more pronounced for firms with greater political exposure, higher lobbying expenditures, greater information asymmetry, and more risk-taking. The empirical results remain robust with various additional checks. Overall, our evidence suggests that managers employ the sentiment of political risk disclosure for aggressive tax purposes.     

Government social media and corporate tax avoidance

With the advent of the new media era, government social media have become an important paradigm for social governance. We perform a large-sample regression and reveal that the higher the quality of taxation bureaus’ operation of government social media, the lower the degree of local enterprises’ tax avoidance, which works through reducing tax avoidance incentives and increasing the difficulty of committing tax avoidance. Moreover, government social media play a substitution effect on tax enforcement and administration. We also find that government social media should focus on strengthening its official, formal and professional characteristics. Given the significant recent changes in how enterprises handle taxation, the proportion of information that taxation bureaus post on system operation should be appropriately increased.     

Director and officer liability and corporate tax avoidance

We use the unique nature of the director and officer liability protection law applicable to Nevada incorporated firms to study how liability protection is related to corporate tax avoidance. We find that firms incorporated in Nevada avoid 32% more federal corporate tax as a fraction of total assets than firms incorporated in Delaware, and 40% more than firms incorporated in other states. Nevada-incorporated firms have a 15% lower cash effective tax rate and an 8% lower GAAP ETR. The results are robust to various specifications including instrumental variable and matching approaches. Greater tax avoidance is also associated with lower payouts to shareholders for Nevada-incorporated firms. The findings are consistent with theories about the complementarity of managerial diversion and tax avoidance for firms with poor monitoring, and they demonstrate how increases in liability protection lead to the unintended consequence of greater firm tax avoidance.     

Directors with foreign experience and corporate tax avoidance

Using a large sample of hand-collected directors' foreign experience data for Chinese listed companies from 2001 to 2016, we examine the impact of directors with foreign experience on corporate tax avoidance. We find a significantly negative association between directors with foreign experience and tax avoidance, suggesting that these directors can help constrain their firms' tax aggressiveness. The result is robust to Heckman two-stage analysis, instrumental variable approach, inclusion of potential omitted variables, change analysis, and alternative tax avoidance measures. Further analyses reveal that reputation concerns and CSR awareness are potential channels through which returnee directors affect corporate tax avoidance. The negative relation between directors with foreign experience and tax avoidance only holds when directors' foreign experiences are derived from countries or regions with higher investor protections. Non-independent directors with foreign experience have larger impacts on corporate tax avoidance than independent directors, and the effect is more pronounced when directors with foreign experience sit on audit committees. Directors' working and studying experiences both have important impacts on corporate tax avoidance. The result also suggests that the negative relation between directors with foreign experience and tax avoidance is more pronounced in non-state-owned firms. Overall, the findings suggest that directors' foreign experience matters for corporate tax behavior in emerging markets.     

Tax avoidance,tax management and corporate social responsibility

This study examines the effect of three measures of corporate social responsibility (CSR) — corporate governance, community and diversity on tax avoidance in firms that use auditor‐provided tax services. This is one of the first studies, to our knowledge, to empirically relate tax avoidance, tax management and CSR literature. By separating the strengths and concerns for each CSR measure, we are able to analyze the effects of a firm's negative and positive social actions on tax avoidance. We find that the interaction of community concerns with tax management fees positively affects both GAAP and Cash ETR, while the interaction of corporate governance strengths and diversity concerns with tax management fees negatively affects Cash ETR. Our results are similar when we use Excess ETR that is not explained by firm specifics. We find additional evidence that CSR affects tax avoidance when we divide firms into portfolios based on CSR levels. Our findings suggest that future studies on tax avoidance and tax management should incorporate CSR.     

Organizational capital,corporate tax avoidance,and firm value

We show that firms with higher levels of organizational capital (OC) exhibit higher levels of tax avoidance and that shareholders view tax avoidance of high OC firms as value-enhancing. We also show that the OC-tax avoidance relation mainly manifests in firms with good internal governance and information environment and in firms that face tight financial constraints. In addition, we document that tax avoidance by high OC firms increases future cash flow and that high OC firms are more likely to invest in tax haven subsidiaries. Overall, our evidence suggests that OC enhances firms' tax efficiency.     

The effect of tax avoidance crackdown on corporate innovation

To constrain the use of intangible assets in tax-motivated state income shifting, many U.S. state governments adopted addback statutes. Addback statutes reduce the tax benefits that firms can gain from creating intangible assets such as patents. Using a sample of U.S. public firms, we examine the effect of addback statutes on corporate innovation behavior. First, the adoption of addback statutes leads to a 4.77 percentage point decrease in the number of patents and a 5.12 percentage point decrease in the number of patent citations. Second, the “disappearing patents” resulting from addback statutes have significant economic value. Third, after a state adopts an addback statute, a firm with material subsidiaries in that state assigns fewer patents to subsidiaries in zero-tax states, whereas the number of patents assigned to the other states does not change. Overall, our findings suggest that addback statutes impede corporate innovation.     

Political costs and corporate tax avoidance: Evidence from sin firms

The products and services of firms operating in sin industries (alcohol, tobacco, gambling, and firearms) run contrary to social norms and can produce significant negative externalities for society. As such, we expect that sin firms are at greater risk of incurring political costs in the form of additional regulation, higher excise taxes, or capital market intervention if they come under scrutiny for their income tax avoidance practices. Because of the nature of their products, regulators and policymakers are likely to face less pushback on new regulations or taxes on these firms. Sin firms start with a lower ability to influence the political process than firms in non-sin industries. Consequently, we hypothesize and find that sin firms exhibit less tax avoidance than non-sin firms, particularly through uncertain and more risky tax avoidance strategies. The negative relationship between the status of sin firms and tax avoidance is less pronounced in firms that accumulate political capital via intensive lobbying activities. Exploiting changes in partisan control of the Congress and White House, difference-in-differences tests show that firearm firms engage in less (more) tax avoidance when the Democrats (Republican) control both the Congress and White House. Overall, we conclude that political costs play an important role in corporate tax avoidance decisions.     

The impact of corporate tax avoidance on analyst coverage and forecasts

Review of Quantitative Finance and Accounting - Corporate tax avoidance is likely to be associated with a high level of earnings management and with high financial opacity in the time-series. On...     

Effect of corporate tax avoidance activities on firm bankruptcy risk

Corporate tax avoidance has been shown to raise the cost of bank debt and lower credit and bond ratings. However, it is unclear whether tax avoidance actually increases a firm’s bankruptcy risk or whether it is just viewed negatively by banks and rating agencies. We find that firms engaging in tax avoidance and firms that are thinly capitalized face higher bankruptcy risk. To account for endogeneity and functional form misspecification, we verify our results using instrumental variable and propensity score matching methods. Our findings are consistent with the view that tax avoidance is a risk-enhancing activity.     

Corporate social responsibility and corporate tax avoidance: The channel effect of consumer awareness

This paper investigates the relationship between corporate social responsibility (CSR) and corporate tax avoidance and the impact of consumer awareness on the constructs. We show that consumer awareness has the effect of decreasing the positive relation between CSR ratings and tax avoidance levels. Our findings are robust to various measures of our constructs. Collectively, the findings of this study lend credence to the risk-management view of CSR and demonstrate that consumer awareness acts as a behavioral intervention and governance mechanism to help mitigate corporate hypocrisy.     

Advertising and tax avoidance

Review of Quantitative Finance and Accounting - We examine the link between firms’ advertising and their tax avoidance. By generating customer awareness, advertising helps shape firm image...     

When dedicated investors are distracted: The effect of institutional monitoring on corporate tax avoidance

This study investigates whether loosened monitoring from institutional investors affects firm tax planning decisions. We take advantage of shocks to unrelated parts of institutional investors’ portfolios and examine how plausibly exogenous changes in monitoring from institutional investors influence the level of firm tax avoidance. We find that investee firms significantly increase their temporary tax avoidance when there are temporary reductions in the attention of their dedicated institutional investors. Cross-sectional tests show that the tax impact of reduced dedicated investor attention and monitoring intensity is more pronounced when a firm’s information environment is less transparent and when a firm is subject to weaker internal governance. Our findings are robust to alternative research designs.