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Short Selling and Corporate Tax Avoidance

Advances in Taxation

ISBN: 978-1-78756-416-9, eISBN: 978-1-78756-415-2

Publication date: 15 November 2018

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.

Keywords

Acknowledgements

Acknowledgments

We thank Yijun Li (AAA discussant), session participants at the 2017 ATA Midyear Meeting and 2017 AAA Annual Meeting, and workshop participants at Texas Tech University for their valuable questions and comments.

Citation

Guo, S.(., Chi, S. and Cook, K.A. (2018), "Short Selling and Corporate Tax Avoidance", Advances in Taxation (Advances in Taxation, Vol. 25), Emerald Publishing Limited, Leeds, pp. 1-28. https://doi.org/10.1108/S1058-749720180000025001

Publisher

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Emerald Publishing Limited

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