Short-Selling Pressure and Corporate Tax Aggressiveness

51 Pages Posted: 7 Apr 2020 Last revised: 29 Oct 2020

See all articles by E. Han Kim

E. Han Kim

University of Michigan, Stephen M. Ross School of Business

Yao Lu

Tsinghua University - School of Economics & Management

Zhang Peng

Central University of Finance and Economics University, School of Public Finance and Taxation

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Date Written: October 6, 2020

Abstract

We study how short-selling pressure affects tax aggressiveness using the pilot program on short sales in Regulation SHO. Using a difference-in-differences approach, we find that higher short-selling pressure significantly reduces tax aggressiveness. To explain the reduction, we offer a simple agency-theoretic model and provide evidence that when short-selling pressure increases, the likelihood of detecting questionable tax shelters increases, discouraging tax aggressiveness. Corroborating this evidence, we also find stronger (weaker) effects of short-selling pressure on firms subject to fewer (more) audits by the IRS before the pilot program. These findings suggest that short-sellers help reduce aggressive tax avoidance schemes.

Keywords: Aggressive Tax Avoidance, Short-Selling Pressure, Detection, Monitoring

JEL Classification: G18; G34; H26

Suggested Citation

Kim, E. Han and Lu, Yao and Peng, Zhang, Short-Selling Pressure and Corporate Tax Aggressiveness (October 6, 2020). Available at SSRN: https://ssrn.com/abstract=3564782 or http://dx.doi.org/10.2139/ssrn.3564782

E. Han Kim

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-764-2282 (Phone)
734-763-3117 (Fax)

Yao Lu (Contact Author)

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

Zhang Peng

Central University of Finance and Economics University, School of Public Finance and Taxation ( email )

Central University of Finance and Economics Univ.
Changping District
Beijing, Beijing 102206
China

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