The Effect of Tax-Motivated Income Shifting on Information Asymmetry

60 Pages Posted: 15 Oct 2014 Last revised: 23 Mar 2018

See all articles by Ciao-Wei Chen

Ciao-Wei Chen

University of Illinois at Urbana-Champaign - Department of Accountancy

Bradford F. Hepfer

Texas A&M University - Department of Accounting

Phillip J. Quinn

University of Washington - Foster School of Business

Ryan J. Wilson

University of Oregon

Date Written: March 20, 2018

Abstract

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

Chen, Ciao-Wei and Hepfer, Bradford F. and Quinn, Phillip J. and Wilson, Ryan J., The Effect of Tax-Motivated Income Shifting on Information Asymmetry (March 20, 2018). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2509546 or http://dx.doi.org/10.2139/ssrn.2509546

Ciao-Wei Chen

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Bradford F. Hepfer

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Phillip J. Quinn (Contact Author)

University of Washington - Foster School of Business ( email )

4295 E Stevens Way NE
PACCAR Hall #468
Seattle, WA 98105
United States

Ryan J. Wilson

University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

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