Institutional Ownership and Corporate Tax Avoidance: New Evidence

54 Pages Posted: 15 May 2016 Last revised: 26 May 2016

See all articles by Mozaffar Khan

Mozaffar Khan

Causeway Capital Management, LLC

Suraj Srinivasan

Harvard Business School

Liang Tan

George Washington University - Department of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: May 13, 2016

Abstract

We provide new evidence on the agency theory of corporate tax avoidance (Slemrod, 2004; Crocker and Slemrod, 2005; Chen and Chu, 2005) by showing that increases in institutional ownership are associated with increases in tax avoidance. Using the Russell index reconstitution setting to isolate exogenous shocks to institutional ownership, and a regression discontinuity design that facilitates sharper identification of treatment effects, we find a significant and discontinuous increase in tax avoidance following Russell 2000 inclusion. The tax avoidance involves the use of tax shelters, and immediate benefits include higher profit margins and likelihood of meeting or beating analyst expectations. Collectively the results shed light on the effect of increased ownership concentration on tax avoidance.

Keywords: Tax avoidance, Agency costs, Institutional ownership

JEL Classification: G30, H26, M40, M41

Suggested Citation

Khan, Mozaffar and Srinivasan, Suraj and Tan, Liang, Institutional Ownership and Corporate Tax Avoidance: New Evidence (May 13, 2016). Available at SSRN: https://ssrn.com/abstract=2779809 or http://dx.doi.org/10.2139/ssrn.2779809

Mozaffar Khan (Contact Author)

Causeway Capital Management, LLC

Suraj Srinivasan

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=pub&facId=10700

Liang Tan

George Washington University - Department of Accountancy ( email )

School of Business and Public Management
Washington, DC 20052
United States

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