Abstract

In this study, we analyze whether the firms conducting seasoned equity offerings (SEOs) pursue more aggressive tax avoidance due to financial necessity. According to the Pecking order theory, companies implement SEO strategy as the last means for funding when it is difficult to raise debt financing. Due to the financial needs, it is expected that the SEO companies do not have easy access the external funds；thus, they increase cash savings through tax avoidance. Considering the cash incentives from corporate tax avoidance, we hypothesize that SEO firms would carry out aggressive tax avoidance strategies to reduce corporate tax expense and cash outflows. We measure the extent of tax avoidance based on four proxies including the cash ETR, the traditional effective tax rate (GAAP ETR), book－tax differences (BTD), and the discretionary book－tax differences by Desai and Dharmapala(2006). Using publicly available data consisting of 2,396 firm－year observations for the period of 2011 to 2015, we find that SEO firms show the larger extent of tax avoidance. This result suggests that companies that raise external funds through SEO pursue internal cash savings through tax avoidance. We also observe that SEO firms have a positive relationship between the size of the equity offerings and the tax avoidance. Specifically, in the case where the size of the SEO is within the top 25%, the degree of tax avoidance is greater than that of others. Besides, the result partly confirms that SEO companies show the greater extent of tax avoidance if the purpose of the SEO is to secure operating funds. This study contributes to the research stream that investigates tax avoidance by examining empirical evidence that SEO firms implement tax avoidance strategies. The results can provide meaningful information to market participants and tax authorities for SEO firms.

Keywords

• tax avoidance
• seasoned equity offering
• book－tax difference
• effective tax rate

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