Distracted institutional shareholders and corporate tax avoidance

Abstract

Nonconforming tax avoidance (i.e., strategies that reduce taxable but not book income) has been extensively studied in accounting research, yet conforming tax avoidance (i.e., strategies that reduce taxable and book income) receives scant attention. To fill the void, I examine institutional shareholder distraction as one determinant of nonconforming and conforming tax avoidance. Using exogenous shocks to unrelated parts of institutional shareholders’ portfolios, I find that institutional shareholder distraction has a negative (null) effect on conforming (nonconforming) tax avoidance. Consistent with institutional shareholder distraction exacerbating agency problems, its negative effect on conforming tax avoidance is alleviated by board monitoring. I further identify the effort aversion channel by showing that this negative effect is mitigated by managerial ability. My study establishes one corporate tax avoidance determinant that only affects conforming tax avoidance, thereby underscoring the importance of simultaneous examination of nonconforming and conforming tax avoidance.