Corporate tax aggressiveness and insider trading

• Main Authors: CHUNG, Sung Gon, GOH, Beng Wee, LEE, Kiat Bee Jimmy, SHEVLIN, Terry
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2019
• Subjects: Tax aggressiveness; Insider trading; Managerial opportunism; Corporate opacity; Accounting; Corporate Finance; Taxation
• Online Access: https://ink.library.smu.edu.sg/soa_research/1782; https://ink.library.smu.edu.sg/context/soa_research/article/2809/viewcontent/Corporate_Tax_Aggressiveness_Insider_2017_pp.pdf
• Institution: Singapore Management University

We examine the association between corporate tax aggressiveness and theprofitability of insider trading under the assumption that insider tradingprofits reflect managerial opportunism. We document that insider purchaseprofitability, but not sales profitability, is significantly higher on average inmore tax aggressive firms. We also find that the positive association between taxaggressiveness and insider purchase profitability is attenuated for firms withmore effective monitoring and is accentuated for firms with a more opaqueinformation environment.In addition, we provide empirical evidence that tax aggressiveness issignificantly associated with greater insider sales volume in the fiscal yearprior to a stock price crash. Finally, we find that the association between taxaggressiveness and insider purchase profitability weakens after theintroduction of FIN 48, consistent with the increased transparency of taxpositions under the new disclosure requirement reducing insiders’ informationadvantage and hence their ability to profit from insider trading. To the extent that insider trading profitsreflect managerial opportunism, our results are consistent with managersexploiting the opacity arising from tax aggressive activities to extract rentfrom shareholders, particularly those who sold their shares to the managers. Ourfindings are particularly important in light of the number of studies relyingon the agency view of tax avoidance to develop arguments or to drawinferences.