FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUES AND TAX AGGRESSIVENESS

Abstract

We examine the association between financial instruments from different levels of fair value hierarchy and tax aggressiveness. Using (1) four effective tax rate measures, and (2) firms? tax lobbying expenditures to proxy for tax aggressiveness, we find consistent results that level 2 and level 3 financial instruments are associated with more tax aggressiveness while level 1 instruments do not exhibit such a pattern. The magnitude of the effect on tax aggressiveness increases from level 1 to level 3 instruments. We also find that the association between financial instruments and tax aggressiveness is more pronounced for firms with poor corporate governance, greater product market power, more geographic dispersion, or increased financial constraints.