Trouble in Paradise? Disclosure After Tax Haven Leaks

Abstract

Tax haven leaks have attracted negative public attention in recent years, prompting scrutiny of corporate behavior in leaked jurisdictions. We investigate whether U.S. companies with subsidiaries in implicated tax havens change their disclosure behavior after a leak. The Offshore Leaks, Panama Papers, Bahamas Leaks, and Paradise Papers are included in this study. We analyze the leaks as separate exogenous shocks to the affected firms’ behavior using a difference-in-differences approach. First, we focus on the readability of tax footnotes in annual reports. Our results suggest that tax footnotes are less readable after a firm’s tax haven is implicated in a leak. This finding suggests that implicated firms try to obfuscate information and hide unethical conduct. Second, we investigate firms’ disclosures of tax expenses using GAAP effective tax rates and find that companies report higher tax expenses after a leak. These changes in behavior could indicate that firms are concerned about the increasingly critical public attitude toward doing business in leaked low-tax jurisdictions and that they are taking measures to counteract possible negative reputational consequences. JEL Classification: F23, G14, H26, M41

Reputational Risk and Corporate Tax Planning

“…In this line, I also respond to a call from Wilde and Wilson (2018) for more research on the reputational costs of tax planning. This study also contributes to a stream of literature indicating that firms are increasingly in the public spotlight regarding their tax behavior (Dyreng, Hoopes and Wilde, 2016;Chen, Schuchard and Stomberg, 2019;Schmal, Schulte Sasse and Watrin, 2021).…”

“…Third, this study ties in with a strand of literature indicating that firms, especially multinational corporations are under increased media scrutiny regarding their tax planning and that affected firms may change their tax behavior in response (e.g. Dyreng, Hoopes and Wilde, 2016;Chen, Schuchard and Stomberg, 2019;Schmal, Schulte Sasse and Watrin, 2021). Nonetheless, the fact that my study presents only limited evidence of a substantial tax planning change is more consistent with previous studies finding that companies tend to make rather superficial changes in response to public scrutiny (Bednar, 2012;Kuhnen and Niessen, 2012;Chen, Schuchard and Stomberg, 2019).…”

Tax havens and international business: A conceptual framework of accountability‐avoiding foreign direct investment

“…In terms of the home and host country‐level factors that would explain accountability‐avoiding FDI , it is important to account for the distance between the home and host countries because such activity is often driven by a relative difference between countries. With this in mind, we identify the following country‐level factors from the extant literature: (1) political economy factors, including tax treaties, which are argued to have an impact on MNE tax strategies (see Hearson, 2018); (2) historical context and colonial influence, such as the Commonwealth and the Royal Crown Dependencies of Jersey, Guernsey and the Isle of Man (see Haberly & Wójcik, 2015b); (3) institutional quality differences and how, for example, liberal market economies differ from coordinated market ones in terms of the tax haven activities in which MNEs engage, which emanate from different institutional contexts (see Jones & Temouri, 2016 for a variety of capitalist perspectives and tax haven uses); (4) the complexity of legislation and regulation across countries (see Palan et al., 2009; Rawlings, 2007); (5) the fiscal preferences of policymakers, particularly during times of recessions and austerity (see Nebus, 2019); (6) the degree of openness and the mobility of capital across borders (see Dharmapala & Hines et al., 2009); (7) the level of media scrutiny (see Schmal et al., 2021); (8) the degree of law enforcement and of tax collection agency funding; and (9) the overall economic environment between the home and host countries. For example, MNEs have been observed to use tax havens via developing countries that are characterized by capital flight (see Ali et al., 2020).…”

The Big 4 Under Pressure: Scanning Work in Transnational Fields*

“…These challengers have engaged with, and criticized, actors that have historically played dominant roles in shaping what is perceived as acceptable corporate tax behavior-in particular the Big 4 and multinational corporations (MNCs). 1 In this context, scandals in the form of tax haven "leaks" 2 have added fuel to the fire in highlighting how the practices of accounting professionals have significant social and economic implications (Daoust and Malsch 2020;Schmal et al 2021;Seabrooke and Wigan 2022). The Big 4, in particular, have been targeted as likely purveyors of tax avoidance and reporting obfuscation for MNCs.…”