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Essays on institutional ownership and tax avoidance
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Traini, Simone (2019) Essays on institutional ownership and tax avoidance. PhD thesis, University of Warwick.
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Official URL: http://webcat.warwick.ac.uk/record=b3494354~S15
Abstract
The accounting and finance literature views institutional investors, such as pensions and insurance companies, investment advisors and banks, hedge funds and mutual funds, as a heterogeneous class of shareholders with different incentives and abilities to monitor corporate management. Chapter 2 of this thesis focuses on the corporate governance role of one such shareholder type, namely foreign institutional investors. One view is that larger ownership levels by foreign institutions could lead companies to myopic decisions in order to boost short-term investment returns. The proponents of this view argue that foreign institutional investors could prompt corporate managers to prioritise short-term earnings over long-term growth, thereby leading companies to short-termist strategies. However, foreign institutions are arguably better positioned to act as efficient monitors of managerial decisions in their investee firms. Due to their independence, they can undertake a more effective monitoring activity since their ties with local business actors, such as managers, governmental authorities and communities, are likely lower relative to their domestic counterparts. In addition, their international expertise and higher degree of financial sophistication makes them better suited to understand growth opportunities of their portfolio firms.
In chapter 2, I examine the effects of foreign institutional ownership on corporate tax planning using an international sample of more than 26,000 firms. If foreign institutions are pure profit-maximizers, they would forego the risks of reputational loss, payments of additional taxes, penalties and interests if a company’s tax strategy is later considered abusive and encourage the adoption of a more aggressive tax avoidance approach to boost short-term after-tax earnings. In contrast, I argue that foreign institutional investors favour a more balanced tax planning approach that trades off costs and benefits of tax avoidance. Results of chapter 2 are consistent with the latter hypothesis. They provide evidence that foreign institutions act as effective monitors by leading corporate management to select a tax avoidance level similar to the tax position of the company’s peers and therefore makes it less likely to attract regulatory and public scrutiny since it does not stand out from other firm peer levels. Results also show that this effect is more pronounced for larger companies, pointing to a political cost interpretation of my findings.
Chapter 3 of this thesis focuses on the role played by index-tracking institutional investors in corporate governance and transparency. Indexed institutions are generally characterized by passive trading strategies, based on an index-benchmarking activity, and low expenses. Some studies claim that this class of investors exert limited monitoring over corporate management because their portfolios include a large number of company stocks and their resources available for monitoring are scarce. In contrast, other studies show evidence consistent with indexed institutions operating as active owners. According to this stance, indexed institutional investors have the incentive to undertake active monitoring over managerial decisions due to their long-term investment horizons linked to index reconstitutions. In chapter 3, I examine whether indexed institutional ownership is associated with greater transparency and information production related to companies’ geographic operations. I find that larger shares of ownership by indexed institutions are associated with greater geographic transparency only in companies that lead most of their operations in tax haven countries and have more entrenched corporate managers. This result is consistent with a view of indexed investors trading off costs and benefits of monitoring by more actively engaging, selectively, with those companies that are more exposed to information asymmetries and governance problems.
Besides external sources of financing, companies can use internally generated funds to finance their activities. One way for companies to generate capital internally is by taking advantage of tax planning opportunities. Reducing tax payments leads to higher tax savings and, presumably, larger cash balances. Yet, companies engaging in tax avoidance incur the risks of reputational loss, additional payments of taxes, interests and penalties if the chosen tax strategy is later ruled improper. In chapter 4, I examine the relation between tax avoidance and firms’ labour investments. Consistent with the argument that risks and uncertainties related to tax avoidance make firms more cautious when investing, I provide evidence that firms with low effective tax rates, my proxy for tax avoidance, undertake sub-optimal labour investments relative to the level justified by the firms’ underlying economic fundamentals and industry medians. I find this effect using a quasi-natural experiment around Ireland’s statutory corporate tax cut of December 1997. More importantly, I find my result to be more pronounced in sub-samples of firms exposed to greater tax risks and uncertainties, which is consistent with the view of firms withholding their hiring decisions in response to potential reductions in cash flows and shareholders’ wealth.
Item Type: | Thesis (PhD) | ||||
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Subjects: | H Social Sciences > HG Finance H Social Sciences > HJ Public Finance |
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Library of Congress Subject Headings (LCSH): | Institutional investments, Institutional investors, Tax planning, Tax exemption, Tax evasion, Corporations -- Finance | ||||
Official Date: | June 2019 | ||||
Dates: |
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Institution: | University of Warwick | ||||
Theses Department: | Warwick Business School | ||||
Thesis Type: | PhD | ||||
Publication Status: | Unpublished | ||||
Supervisor(s)/Advisor: | Voulgaris, Georgios ; Klein, April, 1956- | ||||
Sponsors: | Economic and Social Research Council (Great Britain) | ||||
Format of File: | |||||
Extent: | x, 190 leaves : illustrations (some colour) | ||||
Language: | eng |
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