The effect of tax-motivated income shifting on information asymmetry |
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Authors: | Ciao-Wei Chen Bradford F Hepfer Phillip J Quinn Ryan J Wilson |
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Institution: | 1.Gies College of Business,University of Illinois at Urbana-Champaign,Champaign,USA;2.Mays Business School,Texas A&M University,College Station,USA;3.Foster School of Business,University of Washington,Seattle,USA;4.Lundquist College of Business, University of Oregon,Eugene,USA |
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Abstract: | We examine whether tax-motivated income shifting by U.S. multinational corporations affects information asymmetry. Using a new firm-year measure of income shifting and a two-stage least squares approach, we find income shifting is positively associated with four measures of information asymmetry. Cross-sectional tests reveal that this effect is more pronounced for firms with large differences between foreign and domestic earnings growth. Using SFAS 131 to improve identification and establish evidence consistent with a causal relation between income shifting and information asymmetry, we demonstrate that the adverse impact of income shifting on information asymmetry is concentrated in firms that discontinue geographic earnings disclosures. Overall, our study provides evidence that significant consequences of information asymmetry are associated with tax-motivated income shifting. |
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