Shareholder Investment Horizons and Tax Aggressiveness

This paper examines whether the investment horizon of a firm’s institutional shareholders affects the extent of tax aggressiveness as proxied by a firm’s five-year cash effective tax rate and yearly permanent book-tax differences. Using a sample of firms with institutional ownership data from 1995-2008, we find more tax aggressiveness for firms held by short-term investors and less tax aggressiveness by firms held by long-term investors. These relations hold after the inclusion of various controls identified in prior research to affect our tax aggressiveness measures. To address the potential endogeneity problem of institutional ownership, we use instrumental variables to predict the institutional ownership variables, and find that the results are robust. Moreover, our results indicate that the effects of institutional ownership on permanent book-tax differences are generally more pronounced for firms with higher levels of cash.