Institutional Ownership and Tax Aggressiveness

Abstract

In this paper we examine whether institutional ownership affects firm tax aggressiveness. We use five-year cash effective tax rate and yearly permanent book-tax differences to proxy for a firm’s level of tax aggressiveness. Using a sample of firms with institutional ownership data from 1995-2008, we find that firms with higher levels of total institutional ownership are generally more tax aggressiveness. When we evaluate the investment horizon of institutions by dividing total institutional ownership into short-term and long-term institutional ownership, we find that firms with relatively higher levels of short-term institutional ownership generally are more tax aggressive. In contrast, firms with relatively higher levels of long-term institutional ownership are generally less tax aggressive. Overall, our results suggest that short-term institutional shareholders influence firm management into becoming more tax aggressive in an effort to maximize firm value in the short-term. However, institutional shareholders with a longer investment horizon discourage firm tax aggressiveness.