Public Pressure and Corporate Tax Behavior

TLDR

ActionAid International’s public pressure on noncompliant UK FTSE 100 firms to disclose all subsidiary locations set the context for this study. The authors use the resulting shock of public scrutiny to investigate whether it changes firms’ subsidiary disclosure, tax‑avoidance behavior, and use of tax‑haven subsidiaries. They compare firms targeted by the pressure with unaffected FTSE 100 peers, measuring changes in disclosure, tax expense, and subsidiary placement. The analysis shows that scrutiny raises tax expense, reduces tax avoidance and tax‑haven subsidiary use, and demonstrates that activist pressure can significantly alter the behavior of large publicly traded firms, extending prior research on this empirical link.

Abstract

ABSTRACT We use a shock to the public scrutiny of firm subsidiary locations to investigate whether that scrutiny leads to changes in firms’ disclosure and corporate tax avoidance behavior. ActionAid International, a nonprofit activist group, levied public pressure on noncompliant U.K. firms in the FTSE 100 to comply with a rule requiring U.K. firms to disclose the location of all of their subsidiaries. We use this setting to examine whether the public pressure led scrutinized firms to increase their subsidiary disclosure, decrease tax avoidance, and reduce the use of subsidiaries in tax haven countries compared to other firms in the FTSE 100 not affected by the public pressure. The evidence suggests that the public scrutiny sufficiently changed the costs and benefits of tax avoidance such that tax expense increased for scrutinized firms. The results suggest that public pressure from outside activist groups can exert a significant influence on the behavior of large, publicly traded firms. Our findings extend prior research that has had little success documenting an empirical relation between public scrutiny of tax avoidance and firm behavior.