The effect of tax-motivated income shifting on information asymmetry
We examine whether tax-motivated income shifting by U.S. multinational corporations affects information asymmetry. Using a new firm-year measure of income shifting and a two-stage least squares approach, we find income shifting is positively associated with four measures of information asymmetry. Cross-sectional tests reveal that this effect is more pronounced for firms with large differences between foreign and domestic earnings growth. Using SFAS 131 to improve identification and establish evidence consistent with a causal relation between income shifting and information asymmetry, we demonstrate that the adverse impact of income shifting on information asymmetry is concentrated in firms that discontinue geographic earnings disclosures. Overall, our study provides evidence that significant consequences of information asymmetry are associated with tax-motivated income shifting.
KeywordsTax-motivated income shifting Information asymmetry Bid-ask spreads Segment reporting Tax havens
JEL ClassificationG14 H26 M41
We appreciate helpful comments from Chelsea Rae Austin, Terrence Blackburne, Brad Blaylock, Jennifer Blouin (discussant), Travis Chow, Asher Curtis, Lisa De Simone (discussant), Alex Edwards, Cristi Gleason, Jeffrey Gramlich, John Hand, Paul Hribar, Jing Huang, Mehmet Kara, Ken Klassen, Bruce Johnson, Sean McGuire, Michelle Nessa, Tom Omer, Stephen Penman (editor), Scott Rane, John Robinson, Steven Savoy, Terry Shevlin, Katie Spangenberg, Bridget Stomberg (discussant), Jake Thornock, Chris Yust, an anonymous referee, and workshop participants at the Review of Accounting Studies 2017 Conference, the 2014 AAA Annual Meeting, the 2014 ATA Midyear Meeting, Texas A&M University, the University of Iowa, and Washington State University. We also thank Scott Dyreng for providing Exhibit 21 subsidiary data. The authors gratefully acknowledge generous financial support from the Gies College of Business, the Mays Business School, the Foster School of Business, and the Lundquist College of Business.
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