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“Financial Derivatives in Corporate Tax Avoidance: An Empirical Examination of New Users”

“Financial Derivatives in Corporate Tax Avoidance: An Empirical Examination of New Users”

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Published by Mark Malone
This isInteresting (readable) study on the role of derivatives in tax avoidance.
“The 900-pound gorilla in all the corporate tax shelter discussion – that practitioners do not want to talk about and the Treasury report mentions only obliquely – is derivatives… Derivatives turbo charge
tax shelters.”
This isInteresting (readable) study on the role of derivatives in tax avoidance.
“The 900-pound gorilla in all the corporate tax shelter discussion – that practitioners do not want to talk about and the Treasury report mentions only obliquely – is derivatives… Derivatives turbo charge
tax shelters.”

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Categories:Types, Research
Published by: Mark Malone on Jan 28, 2013
Copyright:Attribution Non-commercial

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05/14/2014

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 Distinguished Lecture Series School of Accountancy W. P. Carey School of Business Arizona State Universit
 
Michael Donohoe
of Fisher School of AccountingUniversity of Floridawill present
“Financial Derivatives in Corporate TaxAvoidance: An Empirical Examination of NewUsers”
onFebruary 4, 20111:30pm in BA 365
 
F
INANCIAL
D
ERIVATIVES IN
C
ORPORATE
 T
 AX
 A 
 VOIDANCE
: A 
N
E
MPIRICAL
E
XAMINATION OF
N
EW
U
SERS
“Job Market Paper” 
Michael P. Donohoe
PhD CandidateUniversity of FloridaFisher School of Accounting PO Box 117166Gainesville, FL 32611-7166mpd@ufl.edu January 2011
I appreciate helpful comments and advice from my dissertation committee: Jon Hamilton, Robert Knechel, Jim Vincent, and especially my chair, Gary McGill. This paper has also benefited from the insight of Bipin Ajinkya,Stephen Asare, Stephen Brown, Will Ciconte, Julie Coffey, Joel Demski, Victoria Dickinson, Carlos Jimenez,Sukyoon Jung, Marcus Kirk, Ping Wang, Ryan Wilson, Song Xue, Ying Zhou, and workshop participants at theUniversity of Florida. Special thanks to John Graham for making available his simulated marginal tax rates. Igratefully acknowledge Stephen Brown for developing the search algorithm that made data collection for this study possible.
 
F
INANCIAL
D
ERIVATIVES IN
C
ORPORATE
 T
 AX
 A 
 VOIDANCE
: A 
N
E
MPIRICAL
E
XAMINATION OF
N
EW
U
SERS
 Abstract
 The inclusion of financial derivatives in numerous tax shelters suggests tax avoidanceis an economically significant, yet previously unexplored, aspect of their use. Accordingly, I investigate the extent to which derivatives facilitate tax avoidance and whether this aspect is detectable from recently enhanced financial statementdisclosures. I find that new users experience reductions in tax burden following theimplementation of a derivatives program. These benefits increase with the magnitudeof derivatives employed anddo not depend on effective hedging of economic risks.Further analyses reveal firms’
ex ante 
preferences for aggressive tax strategies have apositive relation with the underlying implementation decision. This evidencecollectively suggests tax avoidance is both a determinant and outcome of derivativeuse.However, similar to the opacity of corporate tax shelters, I find no indication of either aspectin footnote disclosures explaining why and how firms use derivatives.
 JEL Classification: 
G32; H25; M41; M48
Keywords: 
financial instruments; derivatives; tax burden; tax avoidance; taxaggressiveness; hedge; speculate.
Data Availability: 
Data used in this study are available from public sources identified in thepaper.

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