Tax Avoidance and Internal Information Asymmetry
Journal of Forensic and Investigative Accounting, Forthcoming
38 Pages Posted: 6 Dec 2018
Date Written: May 1, 2018
We investigate the impact of a firm’s internal information asymmetry on its tax planning. Firms with more informed lower-level managers are described as having high internal information asymmetry, while those where top-level managers know more are characterized as having low internal information asymmetry. Using differences between top- and division-level managers’ trading profits of their own company’s stock as a proxy for internal information asymmetry, we show that tax avoidance is higher for firms with high information asymmetry. Further, we find the tax savings are greater for geographically dispersed firms, consistent with divisional managers playing a bigger role in key decisions of operationally complex firms. Overall, our study adds to the understanding of divisional managers’ roles. By showing that their information advantage impacts overall tax strategy, we contribute to a burgeoning stream of research which shows divisional managers matter for significant firm outcomes such as valuation and external financial reporting quality.
Keywords: tax avoidance, internal information asymmetry
JEL Classification: M41
Suggested Citation: Suggested Citation