The Effect of Hedge Fund Activism on Corporate Tax Avoidance

Author:

Cheng C. S. Agnes1,Huang Henry He2,Li Yinghua3,Stanfield Jason4

Affiliation:

1. The Hong Kong Polytechnic University and Louisiana State University

2. Prairie View A&M University and University of Houston

3. Baruch College–CUNY

4. Purdue University

Abstract

ABSTRACT This paper examines the impact of hedge fund activism on corporate tax avoidance. We find that relative to matched control firms, businesses targeted by hedge fund activists exhibit lower tax avoidance levels prior to hedge fund intervention, but experience increases in tax avoidance after the intervention. Moreover, findings suggest that the increase in tax avoidance is greater when activists have a successful track record of implementing tax changes and possess tax interest or knowledge as indicated by their Securities and Exchange Commission (SEC) 13D filings. We also find that these greater tax savings do not appear to result from an increased use of high-risk and potentially illegal tax strategies, such as sheltering. Taken together, the results suggest that shareholder monitoring of firms, in the form of hedge fund activism, improves tax efficiency. JEL Classifications: G32; G34; H26. Data Availability: Data are available from sources identified in the text.

Publisher

American Accounting Association

Subject

Economics and Econometrics,Finance,Accounting

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3. Badertscher, B., S. Katz, and S. Rego. 2010 b . The Impact of Public and Private Equity Ownership, Financial Reporting Pressure, and Debt Financing on Corporate Tax Avoidance . Working paper , University of Notre Dame, Columbia University, and Indiana University .

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5. Bratton, W. 2006 . Hedge Funds and Governance Targets . Working paper , University of Pennsylvania .

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