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

TLDR

Prior research has linked firm characteristics to aggressive tax reporting and tax shelter participation. This study investigates how aggressive corporate tax reporting spreads by modeling firms’ adoption of the corporate‑owned life insurance (COLI) shelter and assessing the role of social environment factors. Drawing on diffusion‑of‑innovation and institutional isomorphism theory, the authors hypothesize that direct and indirect ties among prior and potential COLI adopters drive the spread of the shelter. Board interlocks significantly raise the likelihood of COLI adoption, there is weak evidence of geographic diffusion, and no concentration of spread among specific audit firms or industries.

Abstract

ABSTRACT: This study investigates the spread of aggressive corporate tax reporting by modeling a firm’s decision to adopt the corporate-owned life insurance (COLI) shelter. Prior studies identify firm characteristics associated with aggressive tax reporting (Desai and Dharmapala 2006; Frank et al. 2009) and tax shelter participation (Wilson 2009; Lisowsky 2010). This study examines whether social environment factors explain the pattern of tax shelter adoption. Building on theory related to the diffusion of innovations and institutional isomorphism, I hypothesize direct and indirect ties between prior and potential shelter adopters influence the spread of shelter use. I find that network ties via board interlocks increase the likelihood of adopting the COLI shelter. I also find weak evidence that COLI use spreads geographically. However, I find no evidence that the spread of COLI use is concentrated among a particular set of audit firms or industries.