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The economic significance of financial derivatives-based corporate tax avoidance
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This working project provides evidence that a significant part of the burgeon population of derivative-using firms effectively avoids corporate tax and that specific tones in 10-K filings can reveal crucial information about firms’ tax preferences. Findings show no evidence that firms hold financial derivative instruments exclusively for risk management purposes (e.g. reduction of earnings volatility), indicating a frequent exploitation of the legislative grey zone of derivatives taxation. Ag -gressive tone or the use of weak modals and complex words in firms’ 10-K filings increase firms’ amount of tax avoidance. In case of aggressiveness, the effect of tone is significantly more negative for derivative-using firms.
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Financial derivatives Corporate tax avoidance Henry sansing Textual analysis