Institutional Shareholders’ Investment Horizons and Tax Avoidance

Abstract

We investigate whether the level of ownership by institutional shareholders with a long-term horizon is associated with firms’ tax avoidance activities. In theory, tax avoidance increases firm value through tax savings; however, institutions with long-term investment horizons are likely to discourage tax avoidance activities if such activities encourage managerial opportunism and reduce transparency. Using a sample of firms with institutional ownership data from 1995-2008, we find less tax avoidance in firms held by long-term institutional shareholders. Probing further, we find these results are generally driven by poorly-governed firms. Overall, our results highlight the role of certain types of institutional shareholders in affecting a firm’s tax avoidance behavior.