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https://ssrn.com/abstract=1325895
 
 

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Beyond Tax Avoidance: Offshore Firms’ Institutional Environment and Financial Reporting Quality


Art Durnev


University of Iowa - Henry B. Tippie College of Business

TieMei Li


University of Ottawa - School of Management

Michel Magnan


Concordia University - Department of Accountancy

February 15, 2017

Journal of Business Finance and Accounting Forthcoming

Abstract:     
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 headquarters in the 15 countries with the strictest legal regimes and have subsidiaries or affiliates in OFCs, we find that such firms exhibit lower financial reporting quality than comparable firms without OFC operations. We also find that as OFC characteristics become more prevalent, firms are more likely to engage in both accrual-based and real earnings management. More importantly, after disentangling OFC characteristics into the opportunity for tax avoidance, regulation arbitrage, and secrecy policies, we find that beyond tax avoidance, regulation arbitrage and the secrecy policies of OFCs significantly affect financial reporting quality. The causal effect of OFC operations is supported by the analysis of financial reporting quality when firms set up OFC operations. Our findings are robust to various additional tests addressing potential endogeneity issues. 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: 57

Keywords: Offshore Financial Centers, Financial Reporting Quality, Earnings Management

JEL Classification: F36, G15, G34, H26, K22, M41


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Date posted: January 5, 2010 ; Last revised: February 17, 2017

Suggested Citation

Durnev, Art and Li, TieMei and Magnan, Michel, Beyond Tax Avoidance: Offshore Firms’ Institutional Environment and Financial Reporting Quality (February 15, 2017). Journal of Business Finance and Accounting Forthcoming . Available at SSRN: https://ssrn.com/abstract=1325895 or http://dx.doi.org/10.2139/ssrn.1325895

Contact Information

Artyom Durnev
University of Iowa - Henry B. Tippie College of Business ( email )
Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States
(514) 398-5394 (Phone)
(514) 398-3876 (Fax)
HOME PAGE: http://www.artdurnev.com
TieMei Li (Contact Author)
University of Ottawa - School of Management ( email )
136 Jean-Jacques Lussier Street
Ottawa, Ontario K1N 6N5
Canada
Michel Magnan
Concordia University - Department of Accountancy ( email )
Montreal, Quebec H3G 1M8
Canada
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