This paper analyzes the links between corporate tax avoidance and the growth of high-powered incentives for managers. A simple model demonstrates the role of feedback effects between tax sheltering and managerial diversion in determining how high-powered incentives influence tax sheltering decisions. A novel measure of corporate tax avoidance (the component of the book-tax gap not attributable to accounting accruals) allows for an investigation of the link between tax avoidance and incentive compensation. Increases in incentive compensation tend to reduce the level of tax sheltering, in a manner consistent with a complementary relationship between diversion and sheltering. In addition, this negative effect is driven primarily by firms with relatively weak governance arrangements, confirming a central prediction of the model. These results can help explain the growing cross-sectional variation among firms in their levels of tax avoidance, the undersheltering puzzle, and why large book-tax gaps are associated with subsequent negative abnormal returns.

This paper investigates how dividend taxes influence portfolio choices, using the response to the distinctive treatment of a subset of foreign dividends in the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA) of 2003. An open-economy after-tax capital asset pricing model is used to derive the hypothesis that JGTRRA should lead to a portfolio reallocation by U.S. investors toward equities in tax-favored countries. A difference-in-difference analysis that compares U.S. equity holdings in affected and unaffected countries finds a substantial portfolio reallocation toward the former. This effect cannot be explained by several potential alternative hypotheses, including differential changes to the preferences of American investors, differential changes in investment opportunities, differential time trends in investment, changed tax evasion behavior, or changes in stock prices associated (or contemporaneous) with JGTRRA.

Do corporate tax avoidance activities advance shareholder interests? This paper tests alternative theories of corporate tax avoidance using unexplained differences between income reported to capital markets and to tax authorities. OLS estimates indicate that the effect of tax avoidance on firm value is a function of firm governance, as predicted by an agency perspective on corporate tax avoidance. Instrumental variables estimates based on exogenous changes in tax regulations yield larger overall effects and reinforce the basic result, as do several robustness checks. The results suggest that the simple view of corporate tax avoidance as a transfer of resources from the state to shareholders is incomplete given the agency problems characterizing shareholder-manager relations.

ABSTRACT The Homeland Investment Act provided a tax holiday for the repatriation of foreign earnings. Advocates argued the Act would alleviate financial constraints by reducing the cost to U.S. multinationals of accessing internal capital. This paper shows that repatriations did not increase domestic investment, employment, or R&D—even for firms that appeared to be financially constrained or lobbied for the holiday. Instead, a $1 increase in repatriations was associated with a $0.60 to $0.92 increase in shareholder payouts. Regulations intended to restrict such payouts were undermined by the fungibility of money. Results indicate that U.S. multinationals were not financially constrained and were well‐governed.