The Effect of Tax-Motivated Income Shifting on Information Asymmetry
60 Pages Posted: 15 Oct 2014 Last revised: 23 Mar 2018
Date Written: March 20, 2018
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.
Keywords: tax-motivated income shifting, information asymmetry, private information gathering, information uncertainty
JEL Classification: G14; H26; M41
Suggested Citation: Suggested Citation