Corporate Tax Aggressiveness and Insider Trading

Abstract

We examine the association between corporate tax aggressiveness and the profitability of insider trading under the assumption that insider trading profits reflect managerial opportunism. We document that insider purchase profitability, but not sales profitability, is significantly higher on average in more tax aggressive firms. We also find that the positive association between tax aggressiveness and insider purchase profitability is attenuated for firms with more effective monitoring and is accentuated for firms with a more opaque information environment. In addition, we provide empirical evidence that tax aggressiveness is significantly associated with greater insider sales volume in the fiscal year prior to a stock price crash. Finally, we find that the association between tax aggressiveness and insider purchase profitability weakens after the introduction of FIN 48, consistent with the increased transparency of tax positions under the new disclosure requirement reducing insiders' information advantage and hence their ability to profit from insider trading. To the extent that insider trading profits reflect managerial opportunism, our results are consistent with managers exploiting the opacity arising from tax aggressive activities to extract rent from shareholders, particularly those shareholders who sold their shares to the managers. Our findings are particularly important in light of the number of studies relying on the agency view of tax avoidance to develop arguments or to draw inferences. Audace des positions fiscales des sociétés et opérations d'initiés RÉSUMÉLes auteurs étudient le lien entre l'audace des positions fiscales des sociétés et la rentabilité des opérations d'initiés, en posant l'hypothèse que les profits engendrés par les opérations d'initiés reflètent l'opportunisme des dirigeants. Les données qu'ils recueillent révèlent que la rentabilité des achats d'initiés, contrairement à celle des ventes d'initiés, est, en moyenne, sensiblement supérieure dans le cas des sociétés dont les positions fiscales sont plus audacieuses. Les auteurs constatent également que le lien positif entre l'audace des positions fiscales et la rentabilité des achats d'initiés s'atténue chez les sociétés qui exercent une surveillance plus efficace et s'accentue chez celles dont l'environnement d'information est plus opaque. Ils recueillent, au surplus, des données empiriques attestant que l'audace des positions fiscales affiche un lien significatif avec un volume de ventes d'initiés plus élevé au * Accepted by Thomas Omer. We thank Thomas Omer and two anonymous reviewers for their constructive feedback and suggestions. We also thank cours de l'exercice précédant un effondrement du cours des actions. Enfin, les auteurs observent que le lien entre l'audace des positions fiscales et la rentabilité des achats d'initiés s'affaiblit après la publication de la FIN 48, du fait que la plus grande transparence des positions fiscales exigée par les nouvelles obligations d'information réduisent l'avantage dont bénéficient les init...

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