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The Spread of Aggressive Corporate Tax Reporting: A Detailed Examination of the Corporate-Owned Life Insurance Shelter
Jennifer L. Brown, Arizona State University
ABSTRACT. 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 firms’ financial reporting incentives, alternative tax savings opportunities and reputational concerns affect the decision to adopt a COLI shelter. I find 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 markets visibility are less likely to adopt a COLI shelter, consistent with a potential reputational cost for being associated with aggressive tax avoidance activities. Additionally, I consider two explanations for the spread of COLI adoption: whether firms imitate prior COLI adopters and whether COLI adoption spreads through common auditors.
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