Information Flows, Tax Avoidance Policy and Firm-Level Institutional Variation: International Evidence

Abstract

Using a large sample from 14 Offshore Financial Centers (OFCs) and from 35 non-OFC countries and jurisdictions, we investigate the extent to which firm-specific information flows are capitalized into stock prices measured by stock price synchronicity. Moreover, we explore the firm-specific information flows of U.S. and U.K. companies that set up affiliates in an OFC or OFCs. We find that synchronicity is higher via a firm’s operations in OFCs, either through direct legal registration or incorporation or, indirectly, through subsidiaries and affiliates than non-offshore companies. Our evidence is important, because it reveals the intertwined effects between tax avoidance policy and firm-level institutional variation on the impounded firm-specific information into stock prices. Furthermore, we also find that the extent of synchronicity varies regarding offshore attributes.

Keywords: Offshore Financial Centers, Market Synchronicity, Tax Avoidance, Legal Institution

JEL Classification: G15, H26, M41, F36