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The role of information asymmetry in closely-held firms’ tax and financial reporting choices

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Pages 185-209 | Published online: 09 Nov 2021


This study examines whether and how closely-held ownership is associated with the relationship between tax and financial reporting aggressiveness. More specifically, we find that although both closely-held and widely-held firms pursue tax savings and higher reported earnings, closely-held firms are less aggressive compared to widely-held firms in pursuing both simultaneously. We argue and find evidence that this is associated with non-controlling shareholders and controlling shareholders concerned about agency costs imposed by each on the other. Furthermore, this finding is driven mainly by firms with high information asymmetry (as proxied by firm size, analyst following and board size), suggesting that information asymmetry is a channel through which closely-held ownership is associated with firms’ tax and financial reporting choices.

Disclosure statement

No potential conflict of interest was reported by the author(s).


1 Based on the literature in this area, firms are considered to be closely-held if the fraction of outstanding shares held by insiders and controlling shareholders is greater than 25% (S. Chen et al., Citation2010; Lai, Ng and Zhang, Citation2014). This group includes officers, directors, and their immediate families, as well as individuals who hold 5% or more of the outstanding shares, trusts, pension plans, and corporate shareholders (Dahlquist, Pinkowitz, Stulz, and Williamson, Citation2013).

2 Statutory Tax Rate was retrieved from OECD tax database.

3 The only exception is the high correlations between Close_Ownership and Close_Ownership_D25, which is expected by construction.

4 The p-value of the hypothesis that the sum of the two coefficients is zero is <0.01.

5 (0.708-0.284)*1.022 = 0.433.

6 0.708*1.022 = 0.724.

7 Our board size data (i.e., number of board members) is retrieved from ISS (Institutional Shareholder Services), and 16 is the median value of board size. Our sample size becomes smaller due to the merge of ISS and Compustat.

8 0.101*[Ln(45) − ln(1)] = 0.384.

9 The number of individual firms with Close_Ownership >50% is 1,398 and the number of individual firms with Close-Ownership >70% is 636, illustrating sufficient variation in the Close_Ownership variable.

10 Based on Thomsen and Watrin (Citation2018), we also constructed a Time variable that equals to the sample year for a given observation minus the first year of our sample period. Our untabulated results show that tax aggressiveness (DTAX) is positively and significantly associated with Time, which suggests that firms became more aggressive in pursuing tax savings over time. More important, the coefficient on the interaction term Time*DFIN is positive and significant at the 5% level. This result indicates that the positive association between tax aggressiveness and financial reporting aggressiveness became larger over time in our sample period.

Additional information


This work was supported by the Social Sciences & Humanities Research Council of Canada [grant number 430-2021-00738].

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