The Economic Effects of Financial Derivatives on Corporate Tax Avoidance
Posted: 12 Nov 2014
Date Written: November 11, 2014
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
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