Tax Knowledge Diffusion via Strategic Alliances

Abstract

We utilize the characteristics of tax knowledge, knowledge diffusion processes, and strategic alliances’ institutionalization to examine whether strategic alliances serve as channels for tax knowledge diffusion between firms. We empirically identify tax knowledge diffusion via strategic alliances by documenting economically meaningful decreases in cash effective tax rates of high-tax firms in strategic alliances with low-tax firms relative to high-tax firms in strategic alliances with other high-tax firms. We identify dynamic treatment effects and find that elapsed time is an important facilitating mechanism of tax knowledge diffusion. Furthermore, we show that geographical proximity, identical industry affiliation, and shared audit firm serve as substitutes rather than as complements for strategic alliances to low-tax firms. Finally, we triangulate our findings to effects on the textual sentiment of 10-K filings and the disclosure of tax haven operations. Overall, our results provide robust evidence for tax knowledge diffusion via strategic alliances.