Do institutional shareholders impact corporate tax avoidance?

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School of Business | Master's thesis
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In this thesis, I study the impact of institutional owners on corporate tax avoidance. Whereas the public discussion regarding the subject is often about tax avoidance scandals and the fear of institutional investors being bad owners – the business world sees tax avoidance as a natural part of the business. This study defines tax avoidance broadly as any activity that reduces explicit taxes. Furthermore, tax avoidance is divided into nonconforming and conforming tax avoidance. Nonconforming tax avoidance originates from the differences in book and tax rules. If no such differences existed, all tax avoidance would be conforming. Findings of prior literature are partly contradictory. Those studies that find the relationship of institutional owners and corporate tax avoidance to be negative highlight the importance of long investment horizon and corporate governance. As for the opposite studies, they regard institutions’ monitoring abilities and better knowledge of effective tax planning to play an important role. The contradictory results of prior research, the increasing share of the institutional owners, and the public concern of institutions being bad owners motivate this study. The research data is collected from the Compustat and Thomson Reuters databases. After processing the data, the resulting sample consists of between 8,624 and 6,686 firm-year observations depending on the tax avoidance measure in the period 2011-2015. As in the prior studies, also the results of this thesis are partly contradictory. I find weak evidence that the institutional ownership is negatively related to the corporate nonconforming tax avoidance. The results for conforming tax avoidance, on the other hand, slightly indicate that firms with more institutional shareholders engage in more conforming tax avoidance. Intriguing results come up related to the number of institutional investors. The results indicate that firms with less than forty different institutional blockholders engage in more nonconforming tax avoidance. It is consistent with my expectations that firms with fewer institutional owners are less exposed to the free-rider problem, and hence those firms benefit more from the institutions’ monitoring abilities and better knowledge of effective tax planning.
Thesis advisor
Jarva, Henry
tax avoidance, institutional shareholder, conforming tax avoidance, nonconforming tax avoidance
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