The Impact of Profitability Pressure and Capital Market Valuation on Tax Haven Engagement

60 Pages Posted: 19 Feb 2025

See all articles by Linda H. Chen

Linda H. Chen

University of Idaho

George J. Jiang

Washington State University

Weiwei Wang

Weber State University (WSU) - Goddard School of Business and Economics

Joseph Zhang

University of Memphis

Date Written: October 01, 2024

Abstract

We investigate three key research questions related to firms’ engagement in tax haven activities: (1) the relationship between firm profitability pressures and tax haven involvement, (2) how the capital markets price tax haven activities as potential risks, and (3) whether firm profitability pressures moderate the relationship between tax haven involvement and capital market risk perceptions. Analyzing data from 1995 to 2020, we find that firms facing profitability pressure are more likely to engage in tax haven activities. Additionally, tax haven involvement is typically viewed negatively by capital markets, signaling heightened information risk and agency costs. However, under profitability pressures, capital markets assess tax haven activities less unfavorably. These findings highlight the need to better understand the drivers of aggressive tax avoidance strategies.

Keywords: Tax avoidance, Information risk, Market value, Tax Haven

JEL Classification: G10, G30, H26, L21, M41

Suggested Citation

Chen, Linda H. and Jiang, George and Wang, Weiwei and Zhang, Joseph, The Impact of Profitability Pressure and Capital Market Valuation on Tax Haven Engagement (October 01, 2024). Available at SSRN: https://ssrn.com/abstract=5094570 or http://dx.doi.org/10.2139/ssrn.5094570

Linda H. Chen (Contact Author)

University of Idaho ( email )

Department of Accounting
College of Business and Economics
Moscow, ID 83944-3174
United States

George Jiang

Washington State University ( email )

Department of Finance and Management Science
Carson College of Business
Pullman, WA 99-4746164
United States
509-3354474 (Phone)

HOME PAGE: http://directory.business.wsu.edu/bio.html?username=george.jiang

Weiwei Wang

Weber State University (WSU) - Goddard School of Business and Economics ( email )

3801 University Circle
Ogden, UT 84408
United States

Joseph Zhang

University of Memphis ( email )

FAB 200
School of Accountancy
Memphis, TN Tennessee 38152
United States

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