Short selling and corporate tax avoidance

Savannah Yuanyuan Guo, Sabrina Chi, Kirsten A. Cook

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

6 Scopus citations

Abstract

This study examines short selling as one external determinant of corporate tax avoidance. Prior research suggests that short sellers have information advantages over retail investors, and high short-interest levels are a bearish signal of targeted stock prices. As a result, when short-interest levels are high, managers have been shown to take actions to minimize the negative effect of high short interest on firms’ stock prices. Tax-avoidance activities may convey a signal of bad news (i.e., high stock price crash risk). We predict that, when short-interest levels are high, managers possess incentives to reduce firm tax avoidance in order to reduce the associated stock price crash risk. Consistent with this prediction, we find that short interest is negatively associated with subsequent tax-avoidance levels. This effect is incremental to other factors identified by prior research. We conclude that short selling significantly constrains corporate tax avoidance.

Original languageEnglish
Title of host publicationAdvances in Taxation
PublisherEmerald Group Publishing Ltd.
Pages1-28
Number of pages28
DOIs
StatePublished - 2018

Publication series

NameAdvances in Taxation
Volume25
ISSN (Print)1058-7497

Keywords

  • Book-tax differences
  • Effective tax rates
  • Short selling
  • Stock price crash risk
  • Tax avoidance
  • Tax shelters

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