Corporate Tax Aggressiveness and Insider Trading

49 Pages Posted: 10 May 2015 Last revised: 16 Jul 2018

See all articles by Sung Gon Chung

Sung Gon Chung

Wayne State University

Beng Wee Goh

Singapore Management University - School of Accountancy

Jimmy Lee

Singapore Management University - School of Accountancy

Terry J. Shevlin

University of California-Irvine; University of California-Irvine

Date Written: November 28, 2017

Abstract

We examine the association between corporate tax aggressiveness and the profitability of insider trading under the assumption that insider trading profits reflect managerial opportunism. We document that insider purchase profitability, but not sales profitability, is significantly higher on average in more tax aggressive firms. We also find that the positive association between tax aggressiveness and insider purchase profitability is attenuated for firms with more effective monitoring and is accentuated for firms with a more opaque information environment. In addition, we provide empirical evidence that tax aggressiveness is significantly associated with greater insider sales volume in the fiscal year prior to a stock price crash. Finally, we find that the association between tax aggressiveness and insider purchase profitability weakens after the introduction of FIN 48, consistent with the increased transparency of tax positions under the new disclosure requirement reducing insiders’ information advantage and hence their ability to profit from insider trading. To the extent that insider trading profits reflect managerial opportunism, our results are consistent with managers exploiting the opacity arising from tax aggressive activities to extract rent from shareholders, particularly those who sold their shares to the managers. Our 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.

Keywords: Tax aggressiveness, insider trading, litigation risk, managerial rent extraction

JEL Classification: G28, G32, H26, M41

Suggested Citation

Chung, Sung Gon and Goh, Beng Wee and Lee, Jimmy and Shevlin, Terry J. and Shevlin, Terry J., Corporate Tax Aggressiveness and Insider Trading (November 28, 2017). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2604376 or http://dx.doi.org/10.2139/ssrn.2604376

Sung Gon Chung

Wayne State University ( email )

Detroit, MI 48202
United States

Beng Wee Goh

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Jimmy Lee

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore, 178900
Singapore
(65) 6808 5234 (Phone)

Terry J. Shevlin (Contact Author)

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
2065509891 (Phone)

University of California-Irvine ( email )

Paul Merage School of Business
Irvine, CA 92697-3125
United States
949-824-6149 (Phone)

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