Tax-Motivated Income Shifting and the Information Environment

Who Invests in Corporate Tax Avoiders?

“…The savings derived from complex corporate tax avoidance can be substantial. 1 However, managers have incentives to limit income tax-related disclosures to avoid scrutiny from tax authorities, and recent research provides evidence that tax avoidance is associated with reduced transparency and reduced disclosure quality (Balakrishnan, Blouin, and Guay 2012;Hope, Ma, and Thomas 2013;Chen, Hepfer, Quinn, and Wilson 2016). Given the complexities of corporate tax laws and tax planning strategies, combined with opaque disclosures regarding corporate income taxes, it is not clear how individual investors view corporate tax avoidance.…”

“…Our study uses data from the same discount brokerage firm as Lawrence (2013) to investigate the effect of corporate tax avoidance on individual investor stock holdings. Given recent evidence that tax avoidance is associated with reduced financial transparency and disclosure quality (Balakrishnan et al 2012;Hope et al 2013;Chen et al 2016), we control for the measures of firm complexity and disclosure quality in Lawrence (2013). As a result, we examine the incremental impact of tax avoidance on individual investors' willingness to own stock in a particular firm.…”