Shifting outbound: the role of managerial ownership in cross-border tax strategies

Purpose: This study examines how managerial ownership influences outbound income shifting, a tax strategy used by multinational firms to transfer profits to lower-tax jurisdictions. Outbound income shifting reduces corporate tax liabilities but can negatively impact government tax revenues and economic equity. Using a novel measure of outbound income shifting originally derived from confidential IRS data, we explore whether higher managerial ownership drives firms to adopt more aggressive tax-planning strategies. Design/methodology/approach: The analysis uses firm-level outbound income shifting scores developed by De Simone et al. (2019), which measure intercompany payments to foreign affiliates. We test the effect of managerial ownership on income shifting using standard regression analysis, propensity score matching, entropy balancing and instrumental variable analysis to address endogeneity concerns. The sample includes 9,125 firm-year observations from US corporations. Findings: The results show a positive, significant effect of managerial ownership on outbound income shifting. Specifically, a one-standard-deviation increase in managerial ownership leads to a 5.5% rise in income-shifting activity. The findings suggest that as managers hold more equity, their incentives align with shareholders' interests, encouraging tax-saving strategies to boost post-tax profits. These results remain consistent across various econometric techniques. Originality/value: This study identifies managerial ownership as a key factor in cross-border tax strategies, bridging the gap between governance mechanisms and tax planning. By using a unique IRS-based dataset, the research enhances understanding of how ownership structures shape corporate tax behaviour. The findings provide insights for policymakers aiming to address aggressive tax avoidance practices.