Does Corporate Tax Avoidance Reduce Individual Investors’ Willingness to Own Stock?

We use data on individual investors’ retail trades and stock holdings to investigate whether corporate tax avoidance affects the willingness of individual investors to own stock. Consistent with corporate tax avoidance increasing the perceived risk of owning stock and the
costs of processing financial information, we provide evidence that individual investors own less stock of firms that avoid more taxes and report more uncertain tax positions. We also find that individuals’ monthly trades are negatively associated with media coverage of corporate taxes, and this result appears to be driven by retail investors selling stock in firms that have negative media coverage of their taxes. We then examine whether investor sophistication and investment strategies impact individuals’ willingness to own stock in firms that avoid taxes. Our results suggest that more sophisticated investors and investors with shorter investment horizons own more stock in
high tax avoidance firms, while more conservative investors own less. Overall, our findings are consistent with significant variation in how individual investors perceive corporate tax avoidance.

Keywords: tax avoidance; individual investors, stock holdings; information asymmetry.

JEL Classification: D14, D22, D8, G11, G12, H26, M4

Suggested Citation: Suggested Citation

Rego, Sonja O. and Williams, Brian and Wilson, Ryan J., Does Corporate Tax Avoidance Reduce Individual Investors’ Willingness to Own Stock? (January 15, 2020). Kelley School of Business Research Paper No. 17-16, Available at SSRN: https://ssrn.com/abstract=2919004 or http://dx.doi.org/10.2139/ssrn.2919004