We provide new evidence on the agency theory of corporate tax avoidance (Slemrod 2004; Crocker and Slemrod 2005; Chen and Chu 2005) by showing that increases in institutional ownership are associated with increases in tax avoidance. Using the Russell index reconstitution setting to isolate exogenous shocks to institutional ownership, and a regression discontinuity design that facilitates sharper identification of treatment effects, we find a significant and discontinuous increase in tax avoidance following Russell 2000 inclusion. The tax avoidance involves the use of tax shelters, and immediate benefits include higher profit margins and likelihood of meeting or beating analyst expectations. Collectively, the results shed light on the effect of increased ownership concentration on tax avoidance.

Whether audit firms should disclose financial statements is controversial among investors, practitioners, and regulators. The debate centers on whether audit firms’ financial statements provide information about audit quality. Using hand-collected data from U.K. audit firms’ financial statements, we construct four measures that capture audit firms’ resource investments (i.e., human capital, workplace environment, technologies) and risk exposures (i.e., litigation provisions). We find that increases in audit firms’ staff costs, investments in tangible assets and IT software, and reductions in litigation provisions are associated with improved audit quality. The information in audit firms’ financial statements is not contained in their transparency reports or regulatory inspection reports. Additional tests show that increases in audit firms’ staff costs and tangible assets, as well as reductions in litigation provisions, are associated with improved audit efficiency.