Tax Knowledge Diffusion via Strategic Alliances

Abstract

This study examines strategic alliances as channels for tax knowledge diffusion between firms. Although strategic alliances are primarily expected to foster their main business purposes, we focus on whether tax knowledge diffuses as a second-order effect of peer-to-peer cooperation. To tease out diffusion of tax knowledge, we investigate changes in the tax planning behavior of high-tax firms in strategic alliances with low-tax firms in comparison to high-tax firms in strategic alliances with other high-tax firms. Our results suggest an economically meaningful decrease in cash effective tax rates of high-tax firms in strategic alliances with low-tax firms relative to high-tax firms in high-tax strategic alliances. Additionally, we find that the adjustment occurs within two years of a strategic alliance’s initiation. We apply textual analysis to control for the strategic alliances’ main business purposes and find that these activities do not drive our results. Thus, we identify tax knowledge diffusion as a second-order effect and conjecture that strategic alliances are not intended to establish tax planning investments. Finally, we test whether partner characteristics intensify or mitigate the identified effects. Overall, our results provide robust evidence for tax knowledge diffusion via strategic alliances.

Keywords: Corporate Tax Planning/Avoidance, Knowledge Diffusion, Network, Strategic Alliance

JEL Classification: C31, G34, H26