Institutional Ownership and Corporate Tax Avoidance: New Evidence
54 Pages Posted: 15 May 2016 Last revised: 26 May 2016
Date Written: May 13, 2016
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: Suggested Citation