Beyond Tax Avoidance: Offshore Firms’ Institutional Environment and Financial Reporting Quality

51 Pages Posted: 5 May 2017

See all articles by Art Durnev

Art Durnev

University of Iowa - Henry B. Tippie College of Business

Tiemei Li

University of Ottawa

Michel Magnan

Concordia University - Department of Accountancy

Date Written: May/June 2017

Abstract

We explore how firms’ operations in Offshore Financial Centers (OFCs) through subsidiaries or affiliates affect the quality of financial reporting. Using a unique and large sample of firms that have headquarters in the 15 countries with the strictest legal regimes and have subsidiaries or affiliates in OFCs, we find that such firms exhibit lower financial reporting quality than comparable firms without OFC operations. We also find that as OFC characteristics become more prevalent, firms are more likely to engage in both accrual‐based and real earnings management. More importantly, after disentangling OFC characteristics into the opportunity for tax avoidance, regulation arbitrage and secrecy policies, we find that beyond tax avoidance, regulation arbitrage and the secrecy policies of OFCs significantly affect financial reporting quality. The causal effect of OFC operations is supported by the analysis of financial reporting quality when firms set up OFC operations. Our findings are robust to various additional tests addressing potential endogeneity issues. We conclude that the assessment of a firm’s institutional environment must encompass the registration status of its subsidiaries or affiliates as well as its own.

Keywords: Offshore Financial Centers, financial reporting quality, earnings management

Suggested Citation

Durnev, Artyom and Li, Tiemei and Magnan, Michel, Beyond Tax Avoidance: Offshore Firms’ Institutional Environment and Financial Reporting Quality (May/June 2017). Journal of Business Finance & Accounting, Vol. 44, Issue 5-6, pp. 646-696, 2017. Available at SSRN: https://ssrn.com/abstract=2962702 or http://dx.doi.org/10.1111/jbfa.12240

Artyom Durnev (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Acquisitions
5020 Main Library
Iowa City, IA 52242-1000
United States
(514) 398-5394 (Phone)
(514) 398-3876 (Fax)

HOME PAGE: http://www.artdurnev.com

Tiemei Li

University of Ottawa ( email )

2292 Edwin Crescent
Ottawa, Ontario K2C 1H7
Canada

Michel Magnan

Concordia University - Department of Accountancy ( email )

Montreal, Quebec H3G 1M8
Canada

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
2
Abstract Views
732
PlumX Metrics