Mimicking Tax Strategies: Evidence from IPOs

Forthcoming, Management Science

49 Pages Posted: 24 Oct 2019 Last revised: 25 Apr 2022

See all articles by James Chyz

James Chyz

University of Tennessee, Knoxville - Department of Accounting and Business Law

Erin Henry

University of Arkansas - Department of Accounting

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Biyu Wu

University of Nebraska-Lincoln

Date Written: April 9, 2022

Abstract

An IPO is a significant event for an individual firm, and the literature examining IPO firms is extensive. However, there is little evidence on the subsequent effect of a significant IPO on incumbent firms. We extend this literature by using firms’ tax policies as a powerful setting to identify whether incumbent firms respond to a significant IPO in their industry. Specifically, we use a first difference analysis to examine whether incumbent firms herd their effective tax rates (ETRs) toward a significant IPO’s ETR. We provide robust evidence that incumbent firms adjust their ETR either up or down by one to two percentage points, on average, for up to three years following a significant IPO entrance to the industry. Cross-sectional analyses support attention-based and tax-specific motives for herding, and additional analysis documents the market attention-based consequences. Finally, we find that incumbents weigh the benefits of herding against the cost of adjusting their ETR and that incumbent firms use discretionary tax accruals as a less costly mechanism to imitate IPO firms’ GAAP ETRs. We contribute to an IPO literature that focuses almost exclusively on the IPO firm. We extend the literature by providing evidence that a significant IPO in an industry can result in a herding response in incumbent firms’ policy choices.

Keywords: IPO, tax benchmark, herding, strategic reactions

JEL Classification: M41, L21, G24

Suggested Citation

Chyz, James and Henry, Erin and Omer, Thomas C. and Wu, Biyu, Mimicking Tax Strategies: Evidence from IPOs (April 9, 2022). Forthcoming, Management Science, Available at SSRN: https://ssrn.com/abstract=3463499 or http://dx.doi.org/10.2139/ssrn.3463499

James Chyz (Contact Author)

University of Tennessee, Knoxville - Department of Accounting and Business Law ( email )

Knoxville, TN
United States
865-974-1701 (Phone)

Erin Henry

University of Arkansas - Department of Accounting ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Biyu Wu

University of Nebraska-Lincoln ( email )

730 N. 14th Street
Lincoln, NE 68588
United States

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