Offshore Leaks, Taxes and Capital Structure

49 Pages Posted: 14 Nov 2018 Last revised: 19 Feb 2019

See all articles by Oliver Zhen Li

Oliver Zhen Li

National University of Singapore (NUS)

Guang Ma

McGill University - Desautels Faculty of Management

Date Written: February 15, 2019

Abstract

Recent leaks expose corporate offshore vehicles, commonly used for tax evasion purposes but secret to outsiders, to the public. We examine the capital structure consequence of such exogenous leaks. Using a difference-in-differences approach, we document that firms exposed in offshore leaks significantly increase their financial leverage during the post-leak period, suggesting a substitution effect between offshore tax sheltering and financial leverage. This effect is stronger for firms exposed in offshore leaks via multiple channels, for firms engaged in offshore leaks as entities, and is weaker for firms facing intense competition where the cost of increasing financial leverage and reducing financial flexibility is high. Firms’ overall effective tax rate does not significantly increase after the leaks, further supporting a substitution between offshore tax sheltering and financial leverage.

Keywords: offshore leaks, offshore tax sheltering, capital structure

JEL Classification: G32, H26

Suggested Citation

Li, Oliver Zhen and Ma, Guang, Offshore Leaks, Taxes and Capital Structure (February 15, 2019). Available at SSRN: https://ssrn.com/abstract=3271520 or http://dx.doi.org/10.2139/ssrn.3271520

Oliver Zhen Li

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Guang Ma (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St W
Montreal, Quebec h3A 1G5
514-398-5075 (Phone)

HOME PAGE: http://guangma.info

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