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The economic effects of financial derivatives on corporate tax avoidance

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  • Donohoe, Michael P.

Abstract

This study estimates the corporate tax savings from financial derivatives. I document a 3.6 and 4.4 percentage point reduction in three-year current and cash effective tax rates (ETRs), respectively, after a firm initiates a derivatives program. The decline in cash ETR equates to $10.69 million in tax savings for the average firm and $4.0 billion for the entire sample of 375 new derivatives users. Of these amounts, $8.75 million and $3.3 billion, respectively, are incremental to tax savings that theory suggests are a byproduct of risk management. Collectively, these findings provide economic insight into the prevalence of derivatives-based tax avoidance.

Suggested Citation

  • Donohoe, Michael P., 2015. "The economic effects of financial derivatives on corporate tax avoidance," Journal of Accounting and Economics, Elsevier, vol. 59(1), pages 1-24.
    • Handle: RePEc:eee:jaecon:v:59:y:2015:i:1:p:1-24
    DOI: 10.1016/j.jacceco.2014.11.001
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    More about this item

    Keywords

    Financial instruments; Derivatives; Tax avoidance; Effective tax rate;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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