Corporate tax aggressiveness and managerial rent extraction: Evidence from insider trading

• Main Authors: Chung, Sung Gon, GOH, Beng Wee, LEE, Kiat Bee Jimmy, SHEVLIN, Terry J.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2015
• Subjects: Tax aggressiveness; insider trading; litigation risk; managerial rent extraction; Accounting; Corporate Finance
• Online Access: https://ink.library.smu.edu.sg/soa_research/1635; https://ink.library.smu.edu.sg/context/soa_research/article/2662/viewcontent/CorporateTaxAggressivenessInsider_2015_wp.pdf
• Institution: Singapore Management University

Recent studies argue that aggressive forms of tax avoidance can be used to facilitate managerial rent extraction from shareholders (e.g., Desai 2004; Desai and Dharmapala 2006; Desai et al. 2007). Despite this agency view of tax avoidance receiving increasing attention in the literature, there is limited empirical evidence that managers actually extract rents generated from tax avoidance activities. In this paper, we examine the association between corporate tax aggressiveness and managerial rent extraction in the form of insider trading profitability. We document that, on average, insider purchase profitability, but not sale profitability, is significantly higher in more tax aggressive firms. The positive association between tax aggressiveness and insider purchase profitability is attenuated for firms with more effective monitoring and for firms with better information environments. Finally, we find that tax aggressiveness is significantly associated with greater insider sale volume in the fiscal year prior to a stock price crash. Our study contributes to the literature by providing empirical evidence that managers do, in fact, extract insider trading rents through corporate tax aggressiveness (Armstrong et al. 2015) and the findings are particularly important in light of the number of studies relying on the agency view of tax avoidance to develop arguments or to draw inferences.