IDEAS home Printed from https://ideas.repec.org/a/spr/reaccs/v23y2018i3d10.1007_s11142-018-9439-1.html
   My bibliography  Save this article

The effect of tax-motivated income shifting on information asymmetry

Author

Listed:
  • Ciao-Wei Chen

    (University of Illinois at Urbana-Champaign)

  • Bradford F. Hepfer

    (Texas A&M University)

  • Phillip J. Quinn

    (University of Washington)

  • Ryan J. Wilson

    (Lundquist College of Business, University of Oregon)

Abstract

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.

Suggested Citation

  • Ciao-Wei Chen & Bradford F. Hepfer & Phillip J. Quinn & Ryan J. Wilson, 2018. "The effect of tax-motivated income shifting on information asymmetry," Review of Accounting Studies, Springer, vol. 23(3), pages 958-1004, September.
    • Handle: RePEc:spr:reaccs:v:23:y:2018:i:3:d:10.1007_s11142-018-9439-1
    DOI: 10.1007/s11142-018-9439-1
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11142-018-9439-1
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11142-018-9439-1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Collins, J & Kemsley, D & Lang, M, 1998. "Cross-jurisdictional income shifting and earnings valuation," Journal of Accounting Research, Wiley Blackwell, vol. 36(2), pages 209-229.
    2. Christopher S. Armstrong & John E. Core & Daniel J. Taylor & Robert E. Verrecchia, 2011. "When Does Information Asymmetry Affect the Cost of Capital?," Journal of Accounting Research, Wiley Blackwell, vol. 49(1), pages 1-40, March.
    3. Bodnar, Gordon M. & Weintrop, Joseph, 1997. "The valuation of the foreign income of US multinational firms: a growth opportunities perspective," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 69-97, December.
    4. Verrecchia, Robert E, 1982. "Information Acquisition in a Noisy Rational Expectations Economy," Econometrica, Econometric Society, vol. 50(6), pages 1415-1430, November.
    5. Dye, Ra, 1985. "Disclosure Of Nonproprietary Information," Journal of Accounting Research, Wiley Blackwell, vol. 23(1), pages 123-145.
    6. Kim, O & Verrecchia, Re, 1991. "Trading Volume And Price Reactions To Public Announcements," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 302-321.
    7. Gallemore, John & Labro, Eva, 2015. "The importance of the internal information environment for tax avoidance," Journal of Accounting and Economics, Elsevier, vol. 60(1), pages 149-167.
    8. Ang, Andrew & Hodrick, Robert J. & Xing, Yuhang & Zhang, Xiaoyan, 2009. "High idiosyncratic volatility and low returns: International and further U.S. evidence," Journal of Financial Economics, Elsevier, vol. 91(1), pages 1-23, January.
    9. French, Kenneth R. & Roll, Richard, 1986. "Stock return variances : The arrival of information and the reaction of traders," Journal of Financial Economics, Elsevier, vol. 17(1), pages 5-26, September.
    10. Ole‐Kristian Hope & Wayne B. Thomas, 2008. "Managerial Empire Building and Firm Disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 46(3), pages 591-626, June.
    11. Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2006. "The Cross‐Section of Volatility and Expected Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 259-299, February.
    12. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    13. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    14. Jung, Wo & Kwon, Yk, 1988. "Disclosure When The Market Is Unsure Of Information Endowment Of Managers," Journal of Accounting Research, Wiley Blackwell, vol. 26(1), pages 146-153.
    15. Madhavan, Ananth & Richardson, Matthew & Roomans, Mark, 1997. "Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks," The Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1035-1064.
    16. Sonja Olhoft Rego & Ryan Wilson, 2012. "Equity Risk Incentives and Corporate Tax Aggressiveness," Journal of Accounting Research, Wiley Blackwell, vol. 50(3), pages 775-810, June.
    17. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    18. Diamond, Douglas W & Verrecchia, Robert E, 1991. "Disclosure, Liquidity, and the Cost of Capital," Journal of Finance, American Finance Association, vol. 46(4), pages 1325-1359, September.
    19. Armstrong, Christopher S. & Balakrishnan, Karthik & Cohen, Daniel, 2012. "Corporate governance and the information environment: Evidence from state antitakeover laws," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 185-204.
    20. Bhattacharya, Utpal & Spiegel, Matthew, 1991. "Insiders, Outsiders, and Market Breakdowns," The Review of Financial Studies, Society for Financial Studies, vol. 4(2), pages 255-282.
    21. Hope, Ole-Kristian & Ma, Mark (Shuai) & Thomas, Wayne B., 2013. "Tax avoidance and geographic earnings disclosure," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 170-189.
    22. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    23. Lang, M & Lundholm, R, 1993. "Cross-Sectional Determinants Of Analyst Ratings Of Corporate Disclosures," Journal of Accounting Research, Wiley Blackwell, vol. 31(2), pages 246-271.
    24. Scott D. Dyreng & Bradley P. Lindsey, 2009. "Using Financial Accounting Data to Examine the Effect of Foreign Operations Located in Tax Havens and Other Countries on U.S. Multinational Firms' Tax Rates," Journal of Accounting Research, Wiley Blackwell, vol. 47(5), pages 1283-1316, December.
    25. Bushman, Robert & Chen, Qi & Engel, Ellen & Smith, Abbie, 2004. "Financial accounting information, organizational complexity and corporate governance systems," Journal of Accounting and Economics, Elsevier, vol. 37(2), pages 167-201, June.
    26. Diamond, Douglas W, 1985. "Optimal Release of Information by Firms," Journal of Finance, American Finance Association, vol. 40(4), pages 1071-1094, September.
    27. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    28. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    29. Holger Daske & Luzi Hail & Christian Leuz & Rodrigo Verdi, 2008. "Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequences," Journal of Accounting Research, Wiley Blackwell, vol. 46(5), pages 1085-1142, December.
    30. Clausing, Kimberly A., 2009. "Multinational Firm Tax Avoidance and Tax Policy," National Tax Journal, National Tax Association;National Tax Journal, vol. 62(4), pages 703-725, December.
    31. Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December.
    32. Thomas, Wayne B., 1999. "A test of the market's mispricing of domestic and foreign earnings," Journal of Accounting and Economics, Elsevier, vol. 28(3), pages 243-267, December.
    33. Verrecchia, Robert E., 1983. "Discretionary disclosure," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 179-194, April.
    34. Darren T. Roulstone, 2003. "Analyst Following and Market Liquidity," Contemporary Accounting Research, John Wiley & Sons, vol. 20(3), pages 552-578, September.
    35. Armstrong, Christopher S. & Blouin, Jennifer L. & Jagolinzer, Alan D. & Larcker, David F., 2015. "Corporate Governance, Incentives, and Tax Avoidance," Research Papers 2134, Stanford University, Graduate School of Business.
    36. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    37. Steven J. Huddart & Bin Ke, 2007. "Information Asymmetry and Cross†sectional Variation in Insider Trading," Contemporary Accounting Research, John Wiley & Sons, vol. 24(1), pages 195-232, March.
    38. Guay, Wayne & Samuels, Delphine & Taylor, Daniel, 2016. "Guiding through the Fog: Financial statement complexity and voluntary disclosure," Journal of Accounting and Economics, Elsevier, vol. 62(2), pages 234-269.
    39. Paul Hribar & D. Craig Nichols, 2007. "The Use of Unsigned Earnings Quality Measures in Tests of Earnings Management," Journal of Accounting Research, Wiley Blackwell, vol. 45(5), pages 1017-1053, December.
    40. Lee, Charles M C & Ready, Mark J, 1991. "Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-746, June.
    41. Mills, Lillian F. & Newberry, Kaye J., 2004. "Do Foreign Multinationals’ Tax Incentives Influence Their U.S. Income Reporting and Debt Policy?," National Tax Journal, National Tax Association;National Tax Journal, vol. 57(1), pages 89-107, March.
    42. Lee, Gemma & Masulis, Ronald W., 2009. "Seasoned equity offerings: Quality of accounting information and expected flotation costs," Journal of Financial Economics, Elsevier, vol. 92(3), pages 443-469, June.
    43. Armstrong, Christopher S. & Blouin, Jennifer L. & Jagolinzer, Alan D. & Larcker, David F., 2015. "Corporate governance, incentives, and tax avoidance," Journal of Accounting and Economics, Elsevier, vol. 60(1), pages 1-17.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Paul Demeré, 2023. "Is tax return information useful to equity investors?," Review of Accounting Studies, Springer, vol. 28(3), pages 1413-1465, September.
    2. Li, Jiyuan & Li, Zihui & Zhang, Min, 2023. "CFOs’ facial trustworthiness and bank loan contracts," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 332-357.
    3. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    4. Ruoyu He & Xueli Chen & Cheng Chen & Jianqiao Zhai & Lixin Cui, 2021. "Environmental, Social, and Governance Incidents and Bank Loan Contracts," Sustainability, MDPI, vol. 13(4), pages 1-19, February.
    5. Mirko Heinle & Delphine Samuels & Daniel Taylor, 2023. "Disclosure Substitution," Management Science, INFORMS, vol. 69(8), pages 4774-4789, August.
    6. Xingyu Lu & Tong Qi & Wenjing Xie, 2023. "Earnings Management of Chinese Listed Multinational Corporations," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 31(6), pages 179-206, November.
    7. Chen, Hanwen & Liu, Siyi & Wang, Junjie & Wu, Zhijuan, 2022. "The effect of geographic proximity on corporate tax avoidance: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 72(C).
    8. Belnap, Andrew, 2023. "The effect of intermediary coverage on disclosure: Evidence from a randomized field experiment," Journal of Accounting and Economics, Elsevier, vol. 75(1).
    9. Christina M. Lewellen, 2023. "Tax haven incorporation and financial reporting transparency," Review of Accounting Studies, Springer, vol. 28(3), pages 1811-1855, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Osswald, Benjamin, 2018. "Corporate tax planning and firms' information environment," arqus Discussion Papers in Quantitative Tax Research 236, arqus - Arbeitskreis Quantitative Steuerlehre.
    2. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    3. Mouselli, Sulaiman & Jaafar, Aziz & Hussainey, Khaled, 2012. "Accruals quality vis-à-vis disclosure quality: Substitutes or complements?," The British Accounting Review, Elsevier, vol. 44(1), pages 36-46.
    4. Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December.
    5. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    6. Yonghong Jia & Xinghua Gao, 2021. "Is managerial rent extraction associated with tax aggressiveness? Evidence from informed insider trading," Review of Quantitative Finance and Accounting, Springer, vol. 56(2), pages 423-452, February.
    7. Matthew J. Bloomfield, 2021. "The Asymmetric Effect of Reporting Flexibility on Priced Risk," Journal of Accounting Research, Wiley Blackwell, vol. 59(3), pages 867-910, June.
    8. Christian Leuz & Peter D. Wysocki, 2016. "The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research," Journal of Accounting Research, Wiley Blackwell, vol. 54(2), pages 525-622, May.
    9. Karthik Balakrishnan & Mary Brooke Billings & Bryan Kelly & Alexander Ljungqvist, 2014. "Shaping Liquidity: On the Causal Effects of Voluntary Disclosure," Journal of Finance, American Finance Association, vol. 69(5), pages 2237-2278, October.
    10. Evgeny Petrov, 2020. "Voluntary Disclosure and Informed Trading," Contemporary Accounting Research, John Wiley & Sons, vol. 37(4), pages 2257-2286, December.
    11. Pham, Mia Hang, 2020. "In law we trust: Lawyer CEOs and stock liquidity," Journal of Financial Markets, Elsevier, vol. 50(C).
    12. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    13. Itay Goldstein & Shijie Yang & Luo Zuo, 2020. "The Real Effects of Modern Information Technologies: Evidence from the EDGAR Implementation," NBER Working Papers 27529, National Bureau of Economic Research, Inc.
    14. Joachim Gassen & Hollis A. Skaife & David Veenman, 2020. "Illiquidity and the Measurement of Stock Price Synchronicity," Contemporary Accounting Research, John Wiley & Sons, vol. 37(1), pages 419-456, March.
    15. Fu, Renhui & Kraft, Arthur & Zhang, Huai, 2012. "Financial reporting frequency, information asymmetry, and the cost of equity," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 132-149.
    16. Daniel A. Bens & Steven J. Monahan, 2004. "Disclosure Quality and the Excess Value of Diversification," Journal of Accounting Research, Wiley Blackwell, vol. 42(4), pages 691-730, September.
    17. Vanessa Behrmann & Lars Hornuf & Daniel Vrankar & Jochen Zimmermann, 2021. "The Deregulation of Quarterly Reporting and Its Effects on Information Asymmetry and Firm Value," CESifo Working Paper Series 9344, CESifo.
    18. Chaudhry, Neeru, 2021. "Tax aggressiveness and idiosyncratic volatility," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    19. Chen, Shenglan & Ma, Hui & Teng, Haimeng & Wu, Qiang, 2022. "Banking liberalization and corporate tax planning: Evidence from natural experiments," Journal of Corporate Finance, Elsevier, vol. 76(C).
    20. Xue, Hao & Zheng, Ronghuo, 2021. "Word-of-mouth communication, noise-driven volatility, and public disclosure," Journal of Accounting and Economics, Elsevier, vol. 71(1).

    More about this item

    Keywords

    Tax-motivated income shifting; Information asymmetry; Bid-ask spreads; Segment reporting; Tax havens;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:reaccs:v:23:y:2018:i:3:d:10.1007_s11142-018-9439-1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.