Institutional Shareholders' Investment Horizons and Tax Avoidance

We investigate whether the level of ownership by institutional shareholders with a long-term horizon is associated with firms' tax avoidance activities. In theory, tax avoidance increases firm value through tax savings; however, institutions with long-term investment horizons are likely to disc...

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Bibliographic Details
Published in:The Journal of the American Taxation Association 2013-03, Vol.35 (1), p.111-134
Main Authors: Khurana, Inder K., Moser, William J.
Format: Article
Language:English
Subjects:
Business ownership
Institutional investments
Organizational behavior
Stockholders
Studies
Tax avoidance
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Summary:We investigate whether the level of ownership by institutional shareholders with a long-term horizon is associated with firms' tax avoidance activities. In theory, tax avoidance increases firm value through tax savings; however, institutions with long-term investment horizons are likely to discourage tax avoidance activities if such activities encourage managerial opportunism and reduce transparency. Using a sample of firms with institutional ownership data from 1995–2008, we find less tax avoidance in firms held by long-term institutional shareholders. Probing further, we find these results are generally driven by poorly governed firms. Overall, our results highlight the role of certain types of institutional shareholders in affecting a firm's tax avoidance behavior.
ISSN:0198-9073
1558-8017
DOI:10.2308/atax-50315