Multinationals' Offshore Operations, Tax Avoidance, and Firm-Specific Information Flows : International Evidence

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)38-89
Journal / PublicationJournal of International Financial Management and Accounting
Volume25
Issue number1
Online published4 Jan 2014
Publication statusPublished - Feb 2014

Abstract

Using a large sample of multinational enterprises (MNEs) over the period 1999-2009, this study investigates whether and how offshore operations via offshore financial centers (OFCs) impact the extent to which firm-specific information is incorporated into stock price, relative to common information. Our analyses show that, irrespective of whether a firm is a Type I offshore firm (directly having headquarters registered in OFCs) or a Type II offshore firm (indirectly setting up subsidiaries in OFCs), the amount of firm-specific information flowing into stock price is lower for offshore firms than for non-offshore firms. We also find that as offshore firms become more aggressive in their tax avoidance strategies, their stock prices impound a lower amount of firm-specific information relative to common information. Finally, we find that a strong offshore proclivity also deters firm-specific information flows, thereby driving up stock price synchronicity. Our results suggest that the opaque and complex nature of business and financial transactions in OFCs, coupled with their institutional characteristics, that is, weak and flexible legal enforcement, zero or extremely low taxation, and low litigation risk, provide offshore firms with not only stronger incentives but also the opportunities and means to adopt opaque disclosure policies and aggressive earnings management. © 2014 John Wiley & Sons Ltd.