Beyond Tax Avoidance: Offshore Firms’ Institutional Environment and Financial Reporting Quality
DOI
10.1111/jbfa.12240
Abstract
We explore how firms’ operations in Offshore Financial Centers (OFCs) through subsidiaries or affiliates affect the quality of financial reporting. Using a unique and large sample of firms that have headquarters in the 15 countries with the strictest legal regimes and have subsidiaries or affiliates in OFCs, we find that such firms exhibit lower financial reporting quality than comparable firms without OFC operations. We also find that as OFC characteristics become more prevalent, firms are more likely to engage in both accrual-based and real earnings management. More importantly, after disentangling OFC characteristics into the opportunity for tax avoidance, regulation arbitrage and secrecy policies, we find that beyond tax avoidance, regulation arbitrage and the secrecy policies of OFCs significantly affect financial reporting quality. The causal effect of OFC operations is supported by the analysis of financial reporting quality when firms set up OFC operations. Our findings are robust to various additional tests addressing potential endogeneity issues. We conclude that the assessment of a firm's institutional environment must encompass the registration status of its subsidiaries or affiliates as well as its own.
Document Type
Restricted Article: Campus only access
Publication Date
2-23-2017
Publisher Statement
Copyright © 2017, Wiley.
DOI: https://doi.org/10.1111/jbfa.12240
The definitive version is available at: https://onlinelibrary.wiley.com/doi/10.1111/jbfa.12240
Recommended Citation
Durnev, A., Li, T., Magnan, M. (2017). Beyond Tax Avoidance: Offshore Firms’ Institutional Environment and Financial Reporting. Journal of Business Finance and Accounting, 44 (5-6), 646-696. https://doi.org/10.1111/jbfa.12240
