Short-Selling Pressure and Corporate Tax Aggressiveness

52 Pages Posted: 19 Jan 2022

See all articles by E. Han Kim

E. Han Kim

University of Michigan, Stephen M. Ross School of Business

Yao Lu

University of Michigan, Stephen M. Ross School of Business; Tsinghua University, SEM

Zhang Peng

Central University of Finance and Economics

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Abstract

We study how short-selling pressure affects tax aggressiveness using the pilot program on short sales in Regulation SHO. Using a difference-in-differences approach, we find that higher short-selling pressure significantly reduces tax aggressiveness. To explain the reduction, we offer a simple agency-theoretic model and provide evidence that when short-selling pressure increases, the likelihood of detecting questionable tax shelters increases, discouraging tax aggressiveness. Corroborating this evidence, we also find stronger (weaker) effects of short-selling pressure on firms subject to fewer (more) audits by the IRS before the pilot program. These findings suggest that short-sellers help reduce aggressive tax avoidance schemes.

Keywords: Aggressive Tax Avoidance, Short-Selling Pressure, Detection, Monitoring

Suggested Citation

Kim, E. Han and Lu, Yao and Peng, Zhang, Short-Selling Pressure and Corporate Tax Aggressiveness. Available at SSRN: https://ssrn.com/abstract=4012870 or http://dx.doi.org/10.2139/ssrn.4012870

E. Han Kim

University of Michigan, Stephen M. Ross School of Business ( email )

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Yao Lu (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

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United States
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Tsinghua University, SEM ( email )

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HOME PAGE: http://sitemaker.umich.edu/yaolu_michigan/yao_lu_s_homepage

Zhang Peng

Central University of Finance and Economics ( email )

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