Tax aggressiveness and shareholder tax rates: Do institutional investors care?

摘要

This dissertation consists of three essays regarding institutional investors and taxes. The first study examines the association between tax reporting aggressiveness and corporate governance provided by institutional ownership. The results show firms with higher levels of short-term institutional owners (transient) are more likely to engage in aggressive tax planning leading to permanent and temporary differences. This result is consistent with short-term investors providing ineffective corporate governance because of activist style trading. Additionally results show firms with higher levels of long-term institutional shareholders (quasi-indexers and dedicated) are less likely to engage in aggressive tax activities. The implication is long-term institutions provide monitoring in the area of tax reporting.;The second study investigates institutional holdings around tax acts when the dividend tax penalty increases. Results show transient investors lower investment in high dividend yield stocks when dividend penalty widens, whereas quasi-indexers continue to hold and increase investment in dividend paying firms. Dedicated long-term investors with large block holdings rebalance portfolios to more tax optimal positions when capital gains taxes decrease. The implication is transient and dedicated institutional investors appear to care about shareholder-level tax rates whereas quasi-indexer institutions do not react in tax sensitive ways. These results are consistent with an institutional tax-clientele effect.;The third study examines the impact of institutional investment on share price around modifications to shareholder-level taxes. Event study methodology is used to study stock prices for firms held by institutions around Revenue Reconciliation Act of 1993 and Taxpayer Relief Act of 1997. The results show Quasi-indexers largely responsible for mitigating negative market reaction for high dividend-yield firms when dividend tax rates increase. When capital gains rates decline the market reaction for firms held by dedicated block holders is consistent with rebalancing portfolios to more optimal tax positions. Overall the three essays provide evidence of variation in sensitivity to tax aggressiveness and shareholder tax rates, dependent on institutional portfolio diversification and investment horizon.