Investment Opportunity Sets, Operating Uncertainty, and Capital Market Pressure: Determinants of Investments in Tax Shelter Activities?

2013 ◽  
Vol 36 (1) ◽  
pp. 1-26 ◽  
Author(s):  
Sean T. McGuire ◽  
Thomas C. Omer ◽  
Jaron H. Wilde
Keyword(s):  
Capital Market ◽  
Tax Avoidance ◽  
Investment Strategy ◽  
Data Availability ◽  
Investment Behavior ◽  
Investment Opportunity ◽  
Opportunity Sets ◽  
Tax Shelter ◽  
Tax Shelters ◽  
Market Pressure

ABSTRACT Prior research documents substantial variation in firms' tax avoidance activities and questions why some firms choose not to take advantage of the apparent benefits of tax planning (i.e., the “undersheltering puzzle”). We provide additional insight into the undersheltering puzzle by investigating the decision to invest in a tax shelter from the perspective of a firm's overall investment strategy. We examine whether three factors associated with traditional investment behavior (firms' investment opportunity sets, operating uncertainty, and capital market pressure) are also associated with investments in tax shelter activities. Our results suggest that firms with large investment opportunity sets and higher operating uncertainty are less likely to invest in tax shelters. We also find that firms with greater capital market pressure are more likely to invest in tax sheltering activities. Overall, we find that factors that influence firms' investment behavior help to explain why more firms do not invest in tax shelters. Data Availability: All data used in this study are available from publicly available sources identified in the manuscript. JEL Classifications: H25, H26, M41

Conforming Tax Avoidance and Capital Market Pressure

2019 ◽  
Vol 94 (6) ◽  
pp. 1-30 ◽  
Author(s):  
Brad A. Badertscher ◽  
Sharon P. Katz ◽  
Sonja Olhoft Rego ◽  
Ryan J. Wilson
Keyword(s):  
Capital Market ◽  
Tax Avoidance ◽  
Future Research ◽  
Corporate Tax ◽  
Public Firms ◽  
Private And Public ◽  
Financial Income ◽  
Validation Tests ◽  
Market Pressures ◽  
Market Pressure

ABSTRACT In this study, we develop a measure of corporate tax avoidance that reduces both financial and taxable income, which we refer to as “book-tax conforming” tax avoidance. We use simulation analyses, LIFO/FIFO inventory method conversions, and samples of private and public firms to validate our measure. We then investigate the prevalence of conforming tax avoidance within a sample of public firms. Results from the validation tests indicate that our measure of conforming tax avoidance successfully captures book-tax conforming transactions. Consistent with expectations, we also find that the extent to which public firms engage in conforming tax avoidance varies systematically with the capital market pressures. Our study develops a new measure of conforming tax avoidance that should be useful in future research and provides new insights on the extent to which public firms are willing to reduce income tax liabilities at the expense of reporting lower financial income.

scholarly journals Social networks and tax avoidance: evidence from a well-defined Norwegian tax shelter

2019 ◽  
Vol 26 (6) ◽  
pp. 1291-1328 ◽  
Author(s):  
Annette Alstadsæter ◽  
Wojciech Kopczuk ◽  
Kjetil Telle
Keyword(s):  
Social Networks ◽  
Social Interactions ◽  
Causal Effect ◽  
Behavioral Responses ◽  
Tax Avoidance ◽  
Capital Gains ◽  
Family Networks ◽  
Tax Shelter ◽  
Tax Shelters ◽  
Set Up

AbstractIn 2005, over 8% of Norwegian shareholders transferred their shares to new (legal) tax shelters intended to defer taxation of capital gains and dividends that would otherwise be taxable in the aftermath of a reform implemented in 2006. Using detailed administrative data, we identify family networks and describe how take-up of tax avoidance progresses within a network. A feature of the reform was that the eligibility to set up a tax shelter changed discontinuously with individual shareholding of a firm and we use this fact to estimate the causal effect of availability of tax avoidance for a taxpayer on tax avoidance by others in the network. We find that eligibility in a social network increases the likelihood that others will take-up. This suggests that taxpayers affect each other’s decisions about tax avoidance, highlighting the importance of accounting for social interactions in understanding enforcement and tax avoidance behavior, and providing a concrete example of optimization frictions in the context of behavioral responses to taxation.

THE ROLE OF MANAGERIAL ABILITY IN INDONESIA: INVESTMENT OPPORTUNITY SETS, ENVIRONMENTAL UNCERTAINTY, TAX AVOIDANCE

2020 ◽  
Vol 8 (4) ◽  
pp. 1305-1318
Author(s):  
David Gilang Dwi Laksono ◽  
Amrie Firmansyah
Keyword(s):  
Stock Exchange ◽  
Tax Avoidance ◽  
Environmental Uncertainty ◽  
Manufacturing Companies ◽  
Investment Opportunity ◽  
Managerial Ability ◽  
Opportunity Sets ◽  
The Government ◽  
Tax Holidays

Purpose of the study: This study aims to obtain empirical evidence of the effect of investment factors that consist of investment opportunity sets and environmental uncertainty on tax avoidance and the role of managerial ability in moderating these effects. Methodology: The analysis was conducted on 49 manufacturing companies listed on the Indonesia Stock Exchange from 2012 to 2018. It was chosen through a purposive sampling method, so 343 observations were obtained. This study engages two-panel data regression models, a model with and without moderation managerial ability. Also, this study employs factor analysis to produce investment opportunity sets that can represent this variable. Main Findings: This study reveals that investment opportunity sets and environmental uncertainty positively affect tax avoidance. Meanwhile, managerial ability failed to moderate the effect of investment opportunity sets and environmental uncertainty on tax avoidance. Implications: The results of the profiling can be used as an early warning, especially for account representatives and tax auditors at the Indonesia Tax Authority, so that potential tax exploration and examination can be more in-depth for firms that fulfill these characteristics. Also, this study provides advice to the Government of Indonesia to provide tax holidays for firms with high IOS who invest in the real sector and tax incentives for firms that are facing an environment with high uncertainty. Novelty: This study deploys managerial ability as a moderating variable between the relationship of investment opportunity sets and environmental uncertainty to tax avoidance. The managerial ability has an important role in firms' IOS and environmental uncertainty faced by the firms because the level of managers will produce differences in the economic outcomes and the effectiveness of the discretion.

Conforming Tax Avoidance and Capital Market Pressure

2015 ◽  
Author(s):  
Brad A. Badertscher ◽  
Sharon P. Katz ◽  
Sonja O. Rego ◽  
Ryan J. Wilson
Keyword(s):  
Capital Market ◽  
Tax Avoidance ◽  
Market Pressure

Did the 2005 Deferred Prosecution Agreement Adversely Impact KPMG's Audit Practice?

2018 ◽  
Vol 38 (1) ◽  
pp. 77-102 ◽  
Author(s):  
Matthew Baugh ◽  
Jeff P. Boone ◽  
Inder K. Khurana ◽  
K. K. Raman
Keyword(s):  
Service Provider ◽  
Audit Quality ◽  
Spillover Effect ◽  
Audit Fees ◽  
Data Availability ◽  
Department Of Justice ◽  
Big 4 ◽  
Tax Shelters

SUMMARY We examine the consequences of misconduct in a Big 4 firm's nonaudit practice for its audit practice. Specifically, we examine whether KPMG's audit practice suffered a loss of audit fees and clients and/or a decline in factual audit quality following the 2005 deferred prosecution agreement (DPA) with the Department of Justice for marketing questionable tax shelters. We find little evidence that the DPA adversely impacted KPMG's audit practice by way of either audit fees or the likelihood of client gains/losses, suggesting little or no harm to KPMG's audit reputation. We also find that the DPA had no effect on the firm's factual audit quality, even for those audit clients that dropped KPMG as their tax service provider. Collectively, our findings suggest that there was no spillover effect from the DPA to KPMG's audit practice. Data Availability: All data are publicly available.

Organized Labor and Inventory Stockpiling

2021 ◽  
Author(s):  
Sophia J.W. Hamm ◽  
Boo Chun Jung ◽  
Woo-Jong Lee ◽  
Daniel G. Yang
Keyword(s):  
Capital Market ◽  
Bargaining Power ◽  
Investment Decision ◽  
Organized Labor ◽  
Costs And Benefits ◽  
Investment Decision Making ◽  
Major Stakeholder ◽  
Information Spillover ◽  
Labor Negotiations ◽  
Market Pressure

We document that managers stockpile excess inventory to mitigate the operational risk posed by labor unions and to maintain bargaining power in labor negotiations. Inventory levels are higher for union firms and are incrementally higher preceding the renegotiation of collective bargaining agreements with unions. Inventory stockpiling at union firms is more salient when capital market pressure for transparency or information spillover from peers constrains managers from using disclosure strategies. We further show that managers weigh the costs and benefits of inventory stockpiling, as holding excess inventory due to the presence of a union is negatively associated with future profitability but provides the benefits of avoiding a stockout and mitigating negative outcomes from a strike. Our findings highlight the importance of a major stakeholder, i.e., labor, in managers' investment decision-making.

Firm Equity Investment Decisions and U.S. GAAP and IFRS Consolidation Control Guidelines: An Empirical Analysis

2017 ◽  
Vol 16 (1) ◽  
pp. 37-57 ◽  
Author(s):  
Allison K. Beck ◽  
Bruce K. Behn ◽  
Andrea Lionzo ◽  
Francesca Rossignoli
Keyword(s):  
Accounting Standards ◽  
Data Availability ◽  
Marginal Effect ◽  
Investment Behavior ◽  
Strategic Investment ◽  
Equity Investment ◽  
Bright Line ◽  
Accounting Scandals ◽  
Control Concept ◽  
The U.S

ABSTRACT It is asserted in the literature that rules-based accounting standards leave room for transaction structuring and that numerous accounting scandals have been linked to companies structuring transactions to avoid bright-line rules. Prior research suggests that bright-line accounting standards motivated companies to avoid the equity method or consolidation accounting by keeping their equity ownership percentages below the key thresholds of 20 percent and 50 percent. However, in recent years, much has changed regarding U.S. GAAP and IFRS principles, especially in terms of the guidelines surrounding business combinations and the concept of control. Now, given the similarity of the U.S. GAAP and IFRS equity investment accounting standards and their more recent emphasis on the control concept, one would not expect either U.S. GAAP or IFRS firms to engage in transaction-structuring behavior, holding concentrated ownership percentages at, or right below, 50 percent. Our study extends prior research by investigating whether this phenomenon (of investment percentages being concentrated right at 50 percent or just below) exists in today's FASB and IASB reporting environments and if so, why? Using ownership data from 2004–2008, we investigate whether firms engage in strategic investment behavior in the vicinity of the 50 percent ownership threshold within the U.S. GAAP and IFRS reporting environments. Interestingly, our univariate results indicate that despite a shift in the accounting standards to a more principles-based definition of control, U.S. GAAP-compliant and IFRS-compliant companies continue to behave in a manner indicative of purposeful transaction structuring around the 50 percent threshold, as evidenced by an unusually heavy concentration of investment at or below 50 percent. This finding could mean that U.S. GAAP- and IFRS-compliant companies (and their auditors) are continuing to anchor to the old bright-line guidance regarding consolidation accounting. We supplement our univariate tests with a regression analysis to examine potential incentives that could explain this investment behavior. We find that leverage has a significant positive marginal effect—increased leverage is associated with a greater likelihood of choosing to keep the investment level at or below 50 percent. Data Availability: The ownership data for this study were obtained from the Bureau van Dijk OSIRIS Ownership database. Data will be made available in accordance with the American Accounting Association's data integrity policy.

How Internal Control Protects Shareholders' Welfare: Evidence from Tax Avoidance in China

2020 ◽  
Vol 19 (2) ◽  
pp. 19-39
Author(s):  
Hsihui Chang ◽  
Xin Dai ◽  
Yurun He ◽  
Maolin Wang
Keyword(s):  
Control Systems ◽  
Internal Control ◽  
Agency Costs ◽  
Tax Avoidance ◽  
Positive Association ◽  
Data Availability ◽  
Corporate Tax ◽  
Controlling Shareholders ◽  
The Public ◽  
Prior Literature

ABSTRACT This paper investigates how effective internal control protects shareholders' welfare in the context of corporate tax avoidance. Prior literature documents a positive association between internal control weakness and low tax avoidance. In this paper, we re-examine this association and complement prior research by finding that the direction of the association between internal control and tax avoidance depends on the level of tax avoidance. Specifically, for firms with low (high) levels of tax avoidance, internal control quality is positively (negatively) associated with tax avoidance. In additional analyses, we further explore how internal control mitigates agency costs for state-owned enterprises and tunneling activities. We show that for state-owned enterprises, which have lower incentives to avoid tax, effective internal control prevents managers from paying more taxes to cater to the controlling shareholders' interests. We also find that the association between tax avoidance and tunneling is reduced by effective internal control systems. Data Availability: Data are available from the public sources cited in the text.

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