We provide new evidence on the agency theory of corporate tax avoidance (Slemrod 2004; Crocker and Slemrod 2005; Chen and Chu 2005) by showing that increases in institutional ownership are associated with increases in tax avoidance. Using the Russell index reconstitution setting to isolate exogenous shocks to institutional ownership, and a regression discontinuity design that facilitates sharper identification of treatment effects, we find a significant and discontinuous increase in tax avoidance following Russell 2000 inclusion. The tax avoidance involves the use of tax shelters, and immediate benefits include higher profit margins and likelihood of meeting or beating analyst expectations. Collectively, the results shed light on the effect of increased ownership concentration on tax avoidance.

We provide new evidence on the agency theory of corporate tax avoidance (Slemrod 2004; Crocker and Slemrod 2005; Chen and Chu 2005) by showing that increases in institutional ownership are associated with increases in tax avoidance. Using the Russell index reconstitution setting to isolate exogenous shocks to institutional ownership, and a regression discontinuity design that facilitates sharper identification of treatment effects, we find a significant and discontinuous increase in tax avoidance following Russell 2000 inclusion. The tax avoidance involves the use of tax shelters, and immediate benefits include higher profit margins and likelihood of meeting or beating analyst expectations. Collectively the results shed light on the effect of increased ownership concentration on tax avoidance.

No abstract

We present new evidence on debt covenant violation (DCV) consequences that have not previously been examined in the literature. In particular, we show that a DCV triggers significant information asymmetry and uncertainty on the part of shareholders and auditors as reflected in higher bid-ask spreads, return volatility, and audit fees. Further, these consequences occur even when lender-imposed costs are relatively lower, consistent with the act of default itself triggering shareholder and auditor uncertainty. The results highlight costs to the firm of having bright-line rules in contracts, and add to an understanding of the consequences of DCVs. Nouvelles donn ees attestant les cons equences de la transgression des clauses restrictives R ESUM ELes auteurs pr esentent de nouvelles donn ees qui attestent les cons equences de la transgression des clauses restrictives des contrats de prêt et qui n'ont pas retenu l'attention des chercheurs jusqu' a maintenant. Ils montrent en particulier que la transgression des clauses restrictives se solde par des niveaux elev es d'asym etrie de l'information et d'incertitude des actionnaires et des auditeurs, ainsi qu'en t emoignent les valeurs sup erieures des ecarts acheteur-vendeur, de la volatilit e des rendements et des honoraires d'audit. En outre, ces cons equences se manifestent même lorsque les coûts exig es par le prêteur sont relativement plus faibles, de la même fac ßon que le d efaut de paiement lui-même d eclenche l'incertitude chez les actionnaires et les auditeurs. Les r esultats mettent en lumi ere les coûts que suppose pour une entreprise la stipulation de r egles claires dans les contrats, et ils permettent de mieux comprendre les cons equences de la transgression des clauses restrictives.

No abstract