A growing literature examines how a firm's behavior impacts the behavior of its peers. In this paper, we examine how changes in tax paying, and the associated financial reporting, impact a firm's peers. Changes to tax paying and reporting behavior at other firms within a peer group can be affected by many of the same factors, such as industry-level tax policy changes or audit risk, so we make use of exogenous—to the peer firms—shocks to tax behavior. Following the methodology of Dyreng, Hanlon, and Maydew (2010), we estimate managerial tax avoidance fixed effects and use these to identify tax rate shocks associated with executive turnover. We find that peer firms respond to these shocks by changing their GAAP tax rates in the same direction. The magnitude of the effect corresponds to an approximately 10 percent response to the average change in peer group GAAP ETR. Our evidence suggests that these peer effects occur only for book (i.e., financial reporting), rather than cash (i.e., real effects), ETR and are concentrated in firms with potentially greater discretion in reporting taxes on foreign earnings.
JEL Classifications: H25; M41.
Data Availability: Data used in this study are available from public sources identified in the paper.
We implement a regression discontinuity design to examine the effect of institutional ownership on tax avoidance. Positive shocks to institutional ownership around Russell index reconstitutions lead, on average, to significant decreases in effective tax rates (ETR) and prioritization of cash over book-tax savings. They also lead to greater use of international tax planning using tax haven subsidiaries. These effects are smaller for firms with initially strong governance and high executive equity compensation, suggesting poor governance as an explanation for the undersheltering puzzle. Furthermore, we observe the largest decreases among high ETR firms, and increases for low ETR firms, consistent with institutional ownership pushing firms towards a common level of tax avoidance. * All remaining errors are ours. We would like to thank
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