Beyond Tax Sheltering: Offshore Firms’ Institutional Environment and Financial Reporting
University of Iowa - Henry B. Tippie College of Business
University of Ottawa - School of Management
Concordia University - Department of Accountancy
September 1, 2014
CAAA Annual Conference 2009 Paper
AFA 2011 Denver Meetings Paper
We explore how firms’ operations in Offshore Financial Centers (OFCs) through subsidiaries or affiliates affect the quality of financial reporting. Using a unique and large sample of firms that have subsidiaries or affiliates in OFCs but registered their headquarters in 15 countries with the strictest legal regimes, we find that firms with offshore operations have lower reporting quality. We also find that as the offshore characteristics become more prevalent, firms are more likely to manage earnings through both accruals and real activities. We provide evidence that U.S. firms with OFC subsidiaries or affiliates exhibit poorer financial reporting quality than U.S. firms with solely domestic operations while U.S. firms with non-OFC foreign subsidiaries or affiliates do not. Moreover, we show that OFCs have an effect on earnings quality that extends beyond tax sheltering. We conclude that the assessment of a firm’s institutional environment must encompass the registration status of its subsidiaries or affiliates as well as its own.
Number of Pages in PDF File: 56
Keywords: Offshore Financial Centers, Financial Reporting, Earnings Management
JEL Classification: F36, G15, G34, H26, K22, M41working papers series
Date posted: January 5, 2010 ; Last revised: October 1, 2014
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