Tax Knowledge Diffusion via Strategic Alliances

Abstract

This study examines strategic alliances as channels for tax knowledge diffusion between firms. Despite solid insights on within-firm determinants of tax planning, little is known about tax knowledge diffusion via cross-firm connections. Since theory suggests that the role of strategic alliances in tax knowledge diffusion is ambiguous, we test our notion empirically. To tease out potential tax knowledge diffusion, we analyze changes in the tax planning behavior of high-tax firms in strategic alliances with low-tax firms in comparison to high-tax firms in strategic alliances with other high-tax firms. We apply a multivariate regression model, a difference-indifferences approach and use basic textual analysis to identify the main business purpose of a strategic alliance. We find a substantial increase in the tax planning behavior of high-tax firms in strategic alliances with low-tax firms relative to high-tax firms in high-tax strategic alliances. Additionally, our results suggests that high-tax firms are able to adjust their tax planning behavior within two years of network initiation when cooperating with low-tax firms. Because we are also able to provide a series of robustness checks, we interpret the identified responses to be consistent with existing tax knowledge diffusion via strategic alliances.