Investor Inattention, Internal Needs, and Tax Avoidance : Evidence from the Effect of Large IPOs on Peers

We examine firms' tax avoidance behavior in response to external investor inattention. We argue that reduced investor attention raises incentivized managers' needs to maintain firm growth and sustain financial resources, leading to more tax avoidance. We exploit a unique setting where peer firms are affected by a large initial public offering (IPO) in the industry, experiencing reduced investor attention, deteriorated firm performance, and reduced accessibility to external funds. We find that peer firms with reduced investor attention increase tax avoidance after large IPOs. The result is mostly driven by (1) firms with reduced investor attention and increased growth needs or (2) firms with reduced investor attention and increased financial constraint, suggesting the prominent role of internal incentives. We rule out two alternative explanations: peers' mimicking behavior and competitive advantages. Our finding is robust to a series of tests, including coarsened exact matching, alternative measures, and alternative large IPO selection criterion