The Spread of Aggressive Corporate Tax Reporting: A Detailed Examination of the Corporate ...

144 Pages·2008·0.7 MB·English

by  Jennifer L. Brown

Copyright
by
Jennifer Lynn Brown
2008
The Dissertation Committee for Jennifer Lynn Brown Certifies that this is the
approved version of the following dissertation:

The Spread of Aggressive Corporate Tax Reporting: A Detailed
Examination of the Corporate-Owned Life Insurance Shelter

Committee:

John Robinson, Supervisor
Stephen Limberg
Linda Krull
Jay Hartzell
Roberton Williams
The Spread of Aggressive Corporate Tax Reporting: A Detailed
Examination of the Corporate-Owned Life Insurance Shelter

by
Jennifer Lynn Brown, B.B.A.; M.P.A.

Dissertation
Presented to the Faculty of the Graduate School of
The University of Texas at Austin
in Partial Fulfillment
of the Requirements
for the Degree of

Doctor of Philosophy

The University of Texas at Austin
May 2008
Dedication

To my parents, John and Ellen Bell,
my husband, Adam Brown,
and my daughter Cara Brown
Acknowledgements

I appreciate the helpful suggestions and insights of my dissertation committee: John Robinson
(Chair), Steve Limberg, Linda Krull, Rob Williams, and Jay Hartzell. I also thank Lil Mills,
Stephanie Sikes and workshop participants at the University of Texas Summer Brown Bag series
for valuable comments. I graciously acknowledge the financial support of the Deloitte
Foundation, the University of Texas at Austin and the McCombs School of Business.
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The Spread of Aggressive Corporate Tax Reporting: A Detailed
Examination of the Corporate-Owned Life Insurance Shelter

Publication No._____________

Jennifer Lynn Brown, Ph.D.
The University of Texas at Austin, 2008

Supervisor: John Robinson

This paper investigates the spread of aggressive corporate tax reporting by modeling a
firm’s decision to adopt the corporate-owned life insurance (COLI) shelter. I use a sample of
known COLI participants to examine whether certain firm characteristics are associated with the
decision to adopt a COLI shelter. I find some evidence that firms with higher performance-
matched discretionary accruals are more likely to adopt a COLI shelter, suggesting a positive
relation between aggressive financial reporting and aggressive tax reporting. I also find that firms
with greater capital market visibility are less likely to adopt a COLI shelter, consistent with a
potential reputational cost for being associated with aggressive tax avoidance activities. Further,
my results suggest that COLI adopters are generally R&D intensive firms with low leverage and
few foreign operations. In addition to firm specific characteristics, I consider two explanations
for the spread of COLI adoption motivated by theory on diffusion of innovations and institutional
isomorphism. I investigate whether firms imitate prior COLI adopters and whether COLI
adoption spreads through common auditors. My results are not consistent with an imitation
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explanation. Further, my results suggest that having the same auditor as a prior COLI adopter
does not increase the likelihood that a firm will adopt COLI.
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Table of Contents
List of Tables.........................................................................................................vi
List of Figures.......................................................................................................vii
INTRODUCTION..................................................................................................1
PART I 6
Chapter 1 Background on Corporate Tax Shelters......................................................6
1.1 Recent Tax Shelter Industry Boom .........................................................6
1.2 Background on Corporate Owned Life Insurance (COLI)......................7
1.2.1 A Tax Arbitrage Opportunity ......................................................7
1.2.2 Development of the COLI Shelter.............................................10
1.3 Accounting Treatment of COLI.............................................................14
Chapter 2 Literature Review.................................................................................17
2.1 Analytical Models of Tax Evasion........................................................17
2.2 Archival Studies of Corporate Tax Avoidance......................................20
Chapter 3 Hypothesis Development.....................................................................28
3.1 Incentives to Report Aggressively ........................................................28
3.2 Opportunities to Report Aggressively...................................................30
3.3 Costs of Reporting Aggressively...........................................................32
Chapter 4 Research Methodology.........................................................................37
4.1 Data and Sample Construction ..............................................................37
4.1.1 The COLI Setting ......................................................................37
4.1.2 Identifying COLI Shelter Participants.......................................39
4.1.3 Control Samples.........................................................................42
4.2 Cross Sectional Variation in Tax Avoidance.........................................46
4.2.1 Logit Model ..............................................................................46
4.2.2 H1 Explanatory Variable...........................................................47
4.2.3 H2 Explanatory Variables..........................................................50
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4.2.4 H3 Explanatory Variables..........................................................52
4.2.5 Additional Control Variables.....................................................53
4.3 Model Limitations..................................................................................56
Chapter 5 Results and Interpretation.....................................................................58
5.1 Descriptive Statistics and Univariate Results........................................58
5.2 Cross Sectional Logit Results................................................................59
5.3 Supplementary Analyses........................................................................64
5.3.1 Disclosure of COLI Activity .....................................................64
5.3.2 Comparison of COLI and Control Firms Over Time.................66
5.3.3 Alternative Proxies for Repuational Concern............................68
5.3.4 Early Analysis of Tax Sheltering and Competitive Pressure.....71
PART II 72
Chapter 6 Literature Review.................................................................................74
Chapter 7 Hypothesis Development.....................................................................80
7.1 Network Influences................................................................................80
7.2 Early Versus Late Adopters...................................................................84
Chapter 8 Research Methodology.........................................................................87
8.1 Cross Sectional Analysis........................................................................87
8.2 Event History Analysis..........................................................................89
8.3 Discrete-time Model..............................................................................91
8.4 Cox Proportional Hazard Model............................................................92
8.5 Split Population Model..........................................................................93
Chapter 9 Results and Interpretation.....................................................................95
9.1 Descriptive Data.....................................................................................95
9.2 Cross Sectional Analysis Results...........................................................95
9.3 Discrete-time Logit Results...................................................................98
9.4 Cox Proportional Model Results............................................................99
9.5 Split Population Model Results...........................................................100
9.6 Additional Test.....................................................................................101
9.6.1 Alternative Control Samples ...................................................101
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9.6.2 Time Variable..........................................................................101
Chapter 10 Summary..........................................................................................103
Appendix A Variable Definitions.......................................................................124
References............................................................................................................125
Vita .....................................................................................................................132
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