The Economic Effects of Financial Derivatives on Corporate Tax Avoidance

Posted: 12 Nov 2014

See all articles by Michael P. Donohoe

Michael P. Donohoe

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: November 11, 2014

Abstract

This study estimates the corporate tax savings from financial derivatives. I document a 3.6 and 4.4 percentage point reduction in three-year current and cash effective tax rates (ETRs), respectively, after a firm initiates a derivatives program. The decline in cash ETR equates to $10.69 million in tax savings for the average firm and $4.0 billion for the entire sample of 375 new derivatives users. Of these amounts, $8.75 million and $3.3 billion, respectively, are incremental to tax savings that theory suggests are a byproduct of risk management. Collectively, these findings provide economic insight into the prevalence of derivatives-based tax avoidance.

Keywords: financial instruments, derivatives, tax avoidance, effective tax rate

JEL Classification: G32, H25, M40

Suggested Citation

Donohoe, Michael P., The Economic Effects of Financial Derivatives on Corporate Tax Avoidance (November 11, 2014). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2523084

Michael P. Donohoe (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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