Long-Term Orientation and Tax Avoidance Regulations

Citation: Bilicka, Katarzyna, Danjue

Clancey-Shang, and Yaxuan Qi. 2024.

Long-Term Orientation and Tax

Avoidance Regulations. Journal of Risk

and Financial Management 17: 102.

https://doi.org/10.3390/

jrfm17030102

Academic Editor: Thanasis Stengos

Received: 28 October 2023

Revised: 16 February 2024

Accepted: 17 February 2024

Published: 1 March 2024

Licensee MDPI, Basel, Switzerland.

This article is an open access article

distributed under the terms and

conditions of the Creative Commons

Attribution (CC BY) license (https://

creativecommons.org/licenses/by/

4.0/).

Journal of

Risk and Financial

Management

Article

Long-Term Orientation and Tax Avoidance Regulations

Katarzyna Bilicka

1,2

, Danjue Clancey-Shang

* and Yaxuan Qi

National Bureau of Economic Research, Center for Economic and Policy Research, Oxford University Centre

for Business Taxation, Park End Street, Oxford OX1 1HP, UK; [email protected]

Jon M. Huntsman School of Business, Utah State University, Logan, UT 84322, USA

Department of Economics and Finance, City University of Hong Kong, Hong Kong, China;

[email protected]

* Correspondence: [email protected]

Abstract: In this paper, we explore the relationship between the culture of the country where a

multinational corporation (MNC) is headquartered and the MNC’s stock market reaction to tax

avoidance regulations. Speciﬁcally, we examine the different responses of MNCs following the

implementation of the 2010 UK reform that restricted proﬁt shifting for a speciﬁc group of ﬁrms. We

ﬁnd that, in countries with short-term-oriented cultures, MNCs affected by this reform experienced

positive stock market responses relative to their unaffected counterparts. This is not found in

long-term-oriented cultures. This difference in response can partly be explained by the differing

perceptions of the role tax havens play in tax minimization practices between more long-term-oriented

cultures and those oriented towards the short term. We provide evidence that investors from more

future-oriented cultures may recognize the short-lived effectiveness of a regulation ex ante, and thus

price the quasi-exogenous market shock differently than their more short-term-oriented counterparts.

Keywords: long-term orientation; debt shifting; multinational companies; tax avoidance; stock

market responses

1. Introduction

Stock markets incorporate investors’ forward-looking expectations. According to the

classic Intertemporal Capital Asset Pricing Model (ICAPM), asset prices are fundamentally

determined by solving the representative agent’s intertemporal consumption–investment

problem (Merton 1973). However, the extent of the forward-looking behavior displayed

by the representative agent and its consequent impact on asset prices remain empirical

questions. In this paper, we aim to shed light on the answers to these questions using

a cultural perspective. Speciﬁcally, we investigate whether the forward-looking culture

of a multinational corporation’s (MNC) home country plays a role in determining how

responsive the stock market is when pricing new information.

To gauge the degree of forward-looking culture in each country, we use a metric

that is part of the set of measures developed by Geert Hofstede and his colleagues to

capture various dimensions of a country’s cultural characteristics (Hofstede 1984, 1991;

Hofstede and Minkov 2010). The six dimensions of national cultures include power distance,

individualism, uncertainty avoidance, motivation towards achievement (formerly known

as masculinity), long-term orientation, and indulgence. These measures have been adopted

by numerous studies that investigate the impacts of national cultures on social, economic,

and political outcomes.

In this paper, we focus on one particular measure, a country’s

long-term orientation, which captures the nation’s tendency to focus on the future. A long-

term-oriented culture places great emphasis on persistence, while its short-term-oriented

counterpart focuses on quick results. The previous literature suggests that a country’s

long-term orientation is associated with many corporate practices. The authors of (Kitching

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et al. 2016) ﬁnd that, in countries with more long-term-oriented cultures, the cost stickiness

in managerial resource adjustment is less pronounced. Lievenbruck and Schmid (2014)

show that companies in long-term-oriented cultures hedge less. Both Wang and Esqueda

(2014) and Haq et al. (2018) document that ﬁrms borrow less in more long-term-oriented

cultures. Graaﬂand and Noorderhaven (2020) document that the joint force of economic

freedom and long-term orientation in a country promotes the corporate social responsibility

practices of ﬁrms in that country. A country’s long-term orientation is also documented to

be associated with stock market behaviors. Chang and Lin (2015) ﬁnd that stock markets in

countries with more long-term-oriented cultures herd less. Khan et al. (2021) show that a

long-term-oriented culture has a moderating effect on investors’ representativeness bias

when making investment decisions. Hoang et al. (2022) ﬁnd that a long-term-oriented

culture had a mitigating effect on the negative reactions of the stock market during the

COVID episode. Several of these ﬁndings align with the notion that a culture oriented

towards the long term is inclined to prioritize the long-term performance and enduring

impacts of incidents and decisions. However, research on the effect of this particular

cultural dimension on the ﬁnancial market’s response to the implementation of regulations

is limited. More speciﬁcally, we know little about whether the long-term effectiveness of a

particular regulation is reﬂected in the ﬁnancial market responses across different cultures.

In this paper, we explore the role of a country’s long-term orientation in mediating the

effects of an anti-tax avoidance regulation on ﬁnancial markets.

In 2010, Worldwide Debt Cap (WDC) was implemented in the UK to limit the amount

of debt that MNCs can hold in the UK relative to their total worldwide debt. The threshold

was put at 75%, creating a treated group of ﬁrms—those that had their debt levels in the

UK above this limit—and a control group—those that did not. We choose the WDC to

study our question of interest for two reasons. First, the quasi-experimental variation

that WDC created allows us to identify the causal effects of a regulation on stock markets

by comparing outcomes for treated and control groups. Second, previous works in the

literature have documented the stock market impacts of the WDC on affected MNCs and

the transient nature of these impacts. Speciﬁcally, applying the WDC as a quasi-natural

experiment, Bilicka et al. (2022b) ﬁnd that the affected MNCs experienced higher stock

market returns and less frequent occasions of extremely negative returns; the MNCs with

worse corporate governance qualities or with access to tax havens drive the results. These

results imply that ﬁrms with substantial information asymmetry experienced signiﬁcantly

positive stock market responses to the WDC, supporting the idea that investors see tax

avoidance as a potential tool to facilitate managerial rent extraction, and anti-tax avoidance

regulations have positive effects on ﬁrm values as they curb the agency problem. However,

Bilicka et al. (2022a) ﬁnd that the affected MNCs responded to the WDC by adjusting their

cross-country debt allocations and real operations to circumvent the reform, and it took on

average three years to ﬁnish the adjustments. This is consistent with the transient nature of

the stock market impacts of the WDC documented in Bilicka et al. (2022b), which shows

that the difference in stock market response between the affected and unaffected MNCs

only lasted for three years.

Since the positive stock market response to the WDC is short-lived for the affected

MNCs, in this study, we investigate whether the long-term orientation dimension of the

culture in an MNC’s home country plays a role in explaining the crosssectional variation of

the stock market impact of this reform. If the capital market focuses on long-term effects

and investors recognize the transient nature of the effectiveness of the WDC, we would

expect to see less signiﬁcant positive market reactions to the implementation of this reform;

potentially, the long-term adverse impact of the WDC on an MNC’s cash ﬂows may even

outweigh its positive effect in curbing agency problems, and lead to a negative overall

inﬂuence on ﬁrm values. On the other hand, in a market that is more short-term-oriented

when investors are pricing a new piece of information, we would expect to see a stronger

positive reaction to the WDC. Consistent with our hypothesis, we ﬁnd that only the affected

MNCs headquartered in countries with short-term-oriented cultures experienced positive

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stock returns following the implementation of the WDC. In addition, affected MNCs from

short-term-oriented cultures are the only ones that experienced signiﬁcant reductions in

the frequency of extreme negative returns. We also ﬁnd that, in the context of the WDC

reform, an MNC’s access to tax havens may be perceived differently by a country with

a long-term-oriented culture compared to a country with a culture oriented towards the

short term.

Our study documents novel evidence on the effectiveness of ﬁnancial regulations in

connection with the national cultures of countries where MNCs are headquartered. In

recent years, the issue of multinational tax avoidance has surged to the forefront of policy

discussions. A widely employed tactic by multinational corporations (MNCs) to reduce

their global tax liability involves strategically allocating debt across various tax jurisdictions.

In response, nations worldwide have implemented various anti-tax avoidance measures

aimed at mitigating this speciﬁc method of proﬁt shifting (Carrizosa et al. 2020; Serrato

2018). The conventional perspective on corporate tax avoidance suggests that engaging in

such practices can provide opportunities for managerial rent extraction, and stock markets

are found to associate tax avoidance and corporate practice that facilitates tax avoidance

with negative connotations (Desai and Dharmapala 2009; Desai et al. 2007; Desai and Hines

2002). Tax avoidance practices are also linked to higher crash risks in the stock market (Kim

et al. 2011). An anti-tax avoidance regulation such as the WDC may mitigate the agency

problem, especially for the worse-governed MNCs Bilicka et al. (2022b). On the other hand,

theoretically, tax planning should enhance the shareholder wealth as it positively affects

corporate cash ﬂows. Therefore, the implementation of anti-tax avoidance regulations could

potentially disrupt cash ﬂows and subsequently have an adverse impact on the overall

value of the company (Goh et al. 2016; Lim 2011; Mills 1998). We complement this literature

by taking a cultural perspective. We provide evidence on how the long-term orientation

dimension of a national culture affects the market reaction to the implementation of an

anti-tax avoidance regulation, when the regulation pertains to cross-country markets. We

document that more future-oriented cultures may recognize the short-lived effectiveness of

a regulation ex ante, and price this quasi-exogenous market shock differently than their

more short-term-oriented counterparts.

We also contribute to the literature that studies the association between a country’s

culture and its ﬁnancial market dynamics. Chui et al. (2010) show that individualism

is positively associated with stock market trading volume and volatility, as well as the

proﬁtability of the momentum trading strategy. Dang et al. (2019) document robust

evidence that ﬁrms in more individualistic cultures exhibit higher levels of crash risk,

possibly caused by earnings management, excessive managerial risk-taking, and investors’

difference of opinion and overconﬁdence. Ashraf (2021) and Hoang et al. (2022) both study

the COVID-19 episode and ﬁnd that the uncertainty avoidance and long-term orientation

dimensions of a culture have moderating effects on stock markets’ reactions to negative

information. In this study, we investigate how a culture’s long-term orientation manifests in

ﬁnancial markets in the context of an anti-tax avoidance regulation, previously documented

for its short-lived effectiveness.

The rest of this paper is structured as follows. Section 2 discusses data and our

empirical strategies. Section 3 provides a discussion of the empirical results. Section 4

concludes.

2. Data and Empirical Strategy

2.1. Sample Construction

We construct our data sample following Bilicka et al. (2022b). First, we collect ﬁnancial

and stock market information for all MNCs that maintained at least one subsidiary in the

UK in 2010 from multiple data sources. The initial sample of MNCs is extracted using

Osiris by the Bureau van Dijk (BvD). Then, we use the CDs of Osiris to extract subsidiaries

of these MNCs year by year. Our analysis is restricted to subsidiaries where the MNC holds

a majority ownership stake of 50% or more, thereby indicating effective control. For the

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UK-based subsidiaries, we extract ﬁnancial data from the FAME dataset to construct the

ratios of UK debt to worldwide debt of an entire MNC. MNCs were subject to the WDC if

this ratio exceeded 75% in 2010. These MNCs form our treatment group. Note that our use

of subsidiary-level data is only for the purpose of constructing the debt ratios.

We collect consolidated ﬁnancial data for the MNC groups from Osiris, and stock

market data from DataStream. The list of tax havens adopted to construct the dummy for

tax haven access is from Bennedsen and Zeume (2018). Combining these data sources, our

sample covers ﬁnancial and stock market data for each MNC at the group level. Our main

analysis focuses on the period of three years prior to and post the WDC, but we collect data

during the full period of 2003–2016 to establish the longer-term dynamics in the data we

study as well. We obtain the culture measure from Hofstede’s website

and merge it with

the corporate ﬁnancial and stock return data.

2.2. Variables of Interest

In this paper, we study the stock market response to the WDC in connection with

the culture of an MNC’s home country. Following Bilicka et al. (2022b), we construct ﬁve

return measures to investigate the effect of WDC on the MNCs’ stock market performance:

annual buy-and-hold return (

Raw Ret

), CAPM

against FTSE100 (

Al pha UK

), CAPM

against S&P500 (

Al pha US

), annual abnormal return against FTSE100 (

Abn Ret UK

), and

annual abnormal return against S&P500 (Abn Ret US).

We also construct four measures to examine the impact of WDC on the incidence

of extremely negative returns the MNCs experience. Following Kim et al. (2011), the

crash risk indicator variables,

Crash UK

and

Crash US

, equal one for a ﬁrm-year if the ﬁrm

experiences one or more crash weeks in the UK (US) market; otherwise,

Crash UK(US)

is equal to zero.

Following Chen et al. (2001), we compute the negative skewness vari-

ables,

Neg Skew UK

and

Neg Skew US

, as additional measures to assess the occurrence of

extremely negative returns.

Bilicka et al. (2021) document that it took the affected MNCs about three years to adjust

their operations in response to the WDC; after that, their overall tax avoidance practice

involving debt did not vary from prior to the regulation. Bilicka et al. (2022b) show that

the stock market positively responded to this regulation over the 3-year window after the

WDC, but then the affected and unaffected converged after. As the adjustments in both real

operations and stock market measures were short-lived, we study whether the markets in

more long-term-oriented cultures can foresee the time limit on the effectiveness of the WDC.

We adopt the long-term orientation measure developed by Hofstede (1991) and ampliﬁed

by Hofstede and Minkov (2010), which captures a national culture’s tendency to focus on

the future. We obtain this measure from Hofstede’s website and merge it with the corporate

ﬁnancial and stock return data. We then split our sample by the median of this measure,

and form the sample with MNCs headquartered in countries with longer-term-orientated

cultures, and MNCs headquartered in countries with shorter-term-orientated cultures.

2.3. Empirical Approach

We use the difference-in-differences (DID) approach to investigate the differential

stock market responses of MNCs to the 2010 UK reform. MNCs that were subject to the

reform, i.e., those with debt ratios above the reform threshold, are in our treated group.

The unaffected MNCs, with debt ratios below the threshold, are in the control group. Our

approach relies on comparing outcomes of treated MNCs to those of control group MNCs.

The identifying assumption behind this method is that the evolution of stock markets

would be the same for both treated and control group MNCs in the absence of the WDC.

As such, we estimate the following model:

i,t

= α + βA f f ected

× Post

+ γX

′

i,t−1

+ η

+ δ

+ ϵ

i,t

(1)

where

i,t

is one of the stock return variables;

A f f ected

is a dummy variable that equals

one if the MNC

is affected by the reform;

Post

is a dummy variable that equals one

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from 2010 onward;

′

i,t−1

is a set of control variables, such as ﬁrm size (lagged logarithm

of total assets), book-to-market ratio, stock return, and stock return volatility.

is the

year ﬁxed effect,

is the ﬁrm ﬁxed effect, and

is the error term. Consequently, the

effect of the WDC is identiﬁed by comparing stock returns of each treated ﬁrm before

and after the reform relative to stock returns of control group MNCs, i.e., estimating the

difference-in-differences (DID) coefﬁcient on

A f f ected

× Post

. The coefﬁcient of interest

is β.

We consider the following stock market variables: the annual buy-and-hold return

(Raw Ret),

’s estimated by regressing daily returns against S&P500 (Alpha US) and

FTSE100 (Alpha UK) indices, and abnormal returns based on CAPM model in which

the market portfolio is proxied by either S&P500 (Abn Ret US) or FTSE100 (Abn Ret

UK) indices.

We then split the sample by the median of the Hofstede long-term orientation measure

(Hofstede 1991), and conduct the aforementioned regression analysis on the sub-sample

of MNCs headquartered in countries with more long-term-oriented cultures, as well as

those headquartered in countries with more short-term-oriented cultures. Note that such a

measure captures a national culture’s tendency to focus on the future. As the stock market

responses to the WDC are documented to be short-lived, we examine whether the ﬁnancial

markets in countries with cultures with different levels of long-term orientation recognize

this time limit and respond accordingly.

We further investigate the roles that tax havens play in mediating the effects of the

WDC in different cultures. As suggested by the literature, tax avoidance practices are more

problematic for ﬁrms with higher levels of information asymmetry. A potential channel

through which the WDC can increase ﬁrm values is to alleviate the information asymmetry

and curb potential agency problems. Bilicka et al. (2022b) ﬁnd that the positive stock

market responses are mostly driven by worse-governed ﬁrms and ﬁrms with access to

tax havens. However, a more future-focused culture could view tax havens as a potential

tool for further tax avoidance practice in the future, while a more short-term-oriented

culture could be inclined to focus on the potential improvement in the current information

asymmetry for ﬁrms with access to tax havens. Hence, we examine the differential effects

of the WDC on ﬁrm values depending on whether a ﬁrm has access to tax haven afﬁliates.

We do that for both MNCs headquartered in countries with long-term and short-term

orientation cultures. We use this analysis to draw inference into the role of a culture’s

long-term orientation dimension in explaining the link between the anti-tax avoidance

regulation and the ﬁrm values.

As the WDC can potentially improve the information environment for the affected

MNCs in the short term, we also examine the effect of the WDC on the occurrence of

extremely negative returns. We use

Crash UK(US)

and

NegSkew UK(US)

to measure the

occurrence of extremely negative returns, and investigate whether the impact of the WDC

plays out differently in long-term-oriented cultures and short-term-oriented cultures.

3. Empirical Findings

3.1. Descriptive Statistics

In this subsection, we discuss the summary statistics for the variables in our empirical

analysis. Table 1 provides the summary statistics for the MNCs in the two sub-samples

split by the long-term orientation dimension of the countries’ cultures.

is the book-to-

market ratio.

Volatility

is the standard deviation calculated using daily returns for each

ﬁrm-year combination.

Haven

is a dummy equal to 1 when an MNC has at least one tax haven afﬁliate in the

ﬁrm structure where it owns more than 50% shares of that afﬁliate.

ROA

is the ratio of

proﬁt and loss before taxes to total assets, and

Leverage

is the ratio of long-term liability to

total assets.

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Table 1. Summary statistics: long- vs. short-oriented cultures.

Variables N Mean Sd Min p25 Median p75 Max

Panel A: MNCs from Long-Term-Oriented Culture

Raw Ret 3920 9.067 52.23 −94.71 −24.36 3.025 32.90 393.7

α US 3902 0.0125 0.187 −0.975 −0.0861 0.0109 0.113 3.225

α UK 3902 0.0117 0.183 −0.984 −0.0863 0.0141 0.112 3.378

Abn Ret US 3737 2.669 44.87 −178.4 −23.93 −3.866 20.59 380.3

Abn Ret UK 3737 1.462 44.72 −178.3 −24.52 −4.985 19.07 342.6

Long-term orient 3920 79.75 12.38 52.90 73.55 87.41 87.91 100

Volatility 3920 2.583 1.359 0.648 1.831 2.349 3.085 52.61

Haven 1060 0.673 0.469 0 0 1 1 1

Roa 893 0.0723 0.125 −0.694 0.0240 0.0645 0.115 1.471

Leverage 3736 0.215 0.157 0 0.0833 0.200 0.325 0.841

Assets 3788 12,423 31,367 1.038 402.0 2146 9378 376,881

BM 1039 0.267 0.656 0.000436 0.0362 0.0797 0.181 4.197

Panel B: MNCs from Short-Term-Oriented Culture

Raw Ret 10,842 14.94 78.20 −99.94 −25.34 5.792 37.53 1774

α US 10,761 0.0357 0.497 −1.524 −0.0757 0.0224 0.121 43.87

α UK 10,761 0.0382 0.497 −1.544 −0.0799 0.0295 0.130 43.90

Abn Ret US 9634 8.600 73.54 −371.8 −24.60 −0.120 27.15 1787

Abn Ret UK 9634 5.993 73.65 −481.9 −26.53 −2.385 24.52 1771

Long-term orient 10,842 37.76 12.37 6.801 25.69 36.02 51.13 51.13

Volatility 10,842 3.044 6.939 0.123 1.742 2.429 3.500 676.0

Haven 6118 0.617 0.486 0 0 1 1 1

Roa 5276 0.0505 0.643 −33.52 0.0225 0.0766 0.137 1.138

Leverage 9437 0.226 0.370 0 0.0563 0.191 0.323 25.04

Assets 10,401 6523 28,432 0.0173 101.6 659.9 3064 797,769

BM 6119 0.214 0.543 0.000436 0.0268 0.0627 0.153 4.197

Summary statistics for variables in the full sample. Panel A reports for the MNCs from long-term-oriented cultures,

and Panel B reports for the MNCs from short-term-oriented cultures. Raw Ret is the annual buy-and-hold return,

US and

UK are

’s estimated by regressing daily returns against S&P500 and FTSE100 indices, respectively,

Abn Ret US and Abn Ret UK are abnormal returns based on CAPM model in which the market portfolio is proxied

by either S&P500 or FTSE100 indices, respectively.

Assets

is in USD millions.

is the book-to-market ratio.

Volatility

is the standard deviation calculated using daily returns for each ﬁrm-year combination.

Board size

is the

number of people on the board.

Haven

is a dummy equal to 1 when an MNC has at least one tax haven afﬁliate in

the ﬁrm structure that it owns more than 50% shares of.

ROA

is the ratio of proﬁt and loss before taxes to total

assets, and Leverage is the ratio of long-term liability to total assets.

Table 1 shows the means, medians, and distributional information for the ﬁrms from

countries with more long-term-oriented cultures (Panel A), and from countries with cultures

that are more short-term-oriented (Panel B). We can see that the ﬁrms from the more long-

term-oriented cultures on average have smaller return measures and are larger in size.

They are largely comparable to the MNCs from more short-term-oriented cultures in other

ﬁrm and return characteristics, such as occurrence of extremely negative returns (

crash

and

negskew), volatility, board size, access to tax havens, and leverage.

3.2. Stock Market Returns

In this subsection, we investigate the effect of the WDC on the stock market returns of

the affected MNCs. We also split the data by the median of the MNC headquarter country

long-term orientation, and conduct the analysis on each sub-sample separately.

In Table 2, we present our results with ﬁve stock market return measures on the full

sample over 2007–2013. As found in Bilicka et al. (2022b), stock markets respond positively

to the WDC, as the difference-in-differences coefﬁcients,

, as outlined in Equation (1), are

positive and statistically signiﬁcant across all speciﬁcations. Effective tax avoidance can

lead to a positive shock to the corporate cash ﬂow, as it allows the ﬁrm to pay less tax.

Consequently, an anti-tax avoidance rule can cause decreases in the ﬁrm value, because

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it limits potential tax savings and reduces after-tax income for an investor. However, tax

avoidance can also provide means to conceal unfavorable information and questionable

corporate practice, and serve as a tool for managerial rent-seeking. From this point of view,

the anti-tax avoidance regulation can curb the agency cost by limiting these rent-seeking

activities and alleviate information asymmetry. As such, anti-tax avoidance regulation can

increase the ﬁrm value. The results we present are in line with the second view. Across

a broad set of measures, the stock market returns of affected ﬁrms have increased after

the WDC.

Table 2. Annual stock returns: baseline results.

(1) (2) (3) (4) (5)

Dep. Var Raw Ret Alpha US Alpha UK Abn Ret US Abn Ret UK

treated = 1 × post = 1 14.59 *** 0.06 *** 0.04 *** 19.48 *** 17.93 ***

(3.54) (4.32) (2.81) (4.34) (4.20)

MNC level controls ✓ ✓ ✓ ✓ ✓

Firm FEs ✓ ✓ ✓ ✓ ✓

Year FEs ✓ ✓ ✓ ✓ ✓

Observations 7139 7139 7139 6745 6745

This table reports the estimated effects of the WDC on MNCs’ raw and abnormal returns over the window of

2007–2013. Raw Ret is the annual buy-and-hold return, Alpha US and Alpha UK are

’s estimated by regressing

daily returns against S&P500 and FTSE100 indices, respectively, Abn Ret US and Abn Ret UK are abnormal returns

based on CAPM model in which the market portfolio is proxied by either S&P500 or FTSE100 indices, respectively.

treated denotes ﬁrms that failed the gateway test in 2010; post is 1 from 2011 onwards. In all columns, we control

for lagged logarithm of total assets, book-to-market ratio, stock return, volatility, and negative skewness against

FTSE100. t-statistics in parentheses. *** denotes signiﬁcance at the 1% level. Standard errors are robust and

two-way clustered over MNC group and year.

We also plot the dynamic evolution of the annual buy-and-hold return,

RawRet

, in

Figure 1 over a longer time horizon. As documented in Bilicka et al. (2022b), the other

return measures follow a similar pattern. We can see that the MNCs affected by WDC

outperform ﬁrms in the control group after the reform, but only over the ﬁrst 3-year period.

After three years, the return measure largely converges between the control and the treated

groups. This short-lived outperformance is consistent with the ﬁnding in Bilicka et al.

(2022a): the affected MNCs took about three years adjusting their debt and operations, and

ﬁnished around 2014. Therefore, from then on, the improved information environment

due to the WDC does not prevail anymore, as ﬁrms are likely to go back to shifting proﬁts

using alternative methods. Hence, investors perceive that they may go back to the old

practices associated with aggressive tax avoidance behavior. Since the effects of the WDC

on both corporate operations and stock market responses only lasted for a limited period,

we further investigate whether the different time horizons of investors make a difference

for MNCs’ stock market behaviors post WDC. We use the long-term orientation dimension

of a culture as a proxy to capture the variation in investors’ time horizons across different

ﬁnancial markets. Our goal is to examine whether stock markets can recognize the time

limit on the WDC’s effect found in our empirical analysis and respond accordingly.

Table 3 presents the results. Panel A presents the results for MNCs from countries with

cultures that are more long-term-oriented, and Panel B presents the results for MNCs from

countries with cultures that are oriented towards the short term. We can see that the positive

stock market responses to the WDC documented by Bilicka et al. (2022b) and shown in

Table 2 are driven by the ﬁrms headquartered in countries with short-term-oriented cultures.

The coefﬁcients on the difference-in-differences term,

treated =

× post =

1, are estimated

to be positive in Panel B, and signiﬁcant in four out of ﬁve speciﬁcations; this is not the case

in Panel A. The ﬁrms headquartered in countries with more long-term-oriented cultures

generally do not respond to the WDC signiﬁcantly and, looking at the direction of the

coefﬁcients, the response tends to be negative. Given that the effectiveness of the WDC is

documented to be short-lived, as Figure 1 demonstrates, our ﬁnding is consistent with how

J. Risk Financial Manag. 2024, 17, 102

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Hofstede deﬁnes the long-term orientation measure: a country’s tendency to focus on the

future. When a country where an MNC is headquartered is more inclined to focus on the

long-term effect of a shock, investors appear to foresee the transient nature of the WDC’s

impacts and do not price it into the ﬁrm value.

-100

-50

100

Raw Return

(relative to 2010)

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Failed gateway test Did not fail gateway test

(a) Stock return

-0.3

-0.1

0.1

0.3

Crash US

(relative to 2010)

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Failed gateway test Did not fail gateway test

(b) Crash risk

Figure 1. Annual stock return and crash risk measures—dynamic plots. Note: These ﬁgures plot the

average annual buy-and-hold return measure and the crash risk measure from each year benchmarked

against year 2010 for both the treated and control groups. We obtain the return measure by regressing

RawRet

on year dummies corresponding to each of the years 2003–2016, and the crash risk measure

by regressing

Crash US

on those year dummies. We omit the year 2010; hence, the measures are

relative to 2010. Standard errors are robust and two-way clustered over MNC group and year. We

plot the 95% conﬁdence interval.

Table 3. Annual stock returns: long-term culture vs. short-term culture.

(1) (2) (3) (4) (5)

Dep. Var Raw Ret Alpha US Alpha UK Abn Ret US Abn Ret UK

Panel A: long-term-oriented cultures

treated = 1 × post = 1 −16.56 −0.11 −0.09 −24.54 −34.56 **

(−0.64) (−1.20) (−0.99) (−1.47) (−2.11)

Observations 861 861 861 825 825

R-squared 0.564 0.495 0.472 0.320 0.305

Panel B: short-term-oriented cultures

treated = 1 × post = 1 11.33 ** 0.05 *** 0.02 21.33 *** 16.30 ***

(2.33) (2.88) (0.93) (3.96) (3.17)

Observations 5035 5035 5035 4864 4864

R-squared 0.359 0.240 0.328 0.113 0.134

This table reports the estimated effects of the WDC on MNCs’ raw and abnormal returns over the window of

2007–2013. t-statistics in parentheses. ***, ** denote signiﬁcance at the 1% and 5% level.

3.3. Tax Haven Access

In this subsection, we interact the difference-in-differences term from Equation (1)

with a dummy variable indicating whether a given MNC has access to any tax haven

J. Risk Financial Manag. 2024, 17, 102

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subsidiaries. Access to tax havens may indicate that a ﬁrm is more “aggressive” in tax

avoidance practice (Gumpert et al. 2016; Hines and Rice 1994). Consistent with this remark,

Dowd et al. (2017) show that, when shifting proﬁts, ﬁrms are more likely to shift more to

tax havens. Hence, MNCs that have access to tax havens are more likely to be subject to

agency problems due to being more “aggressive” and engaging in more complex ﬁnancial

arrangements that could lead to less information transparency. Bilicka et al. (2022b) ﬁnd

that MNCs with access to tax havens drive the positive stock market responses they ﬁnd

for the affected ﬁrms post WDC, consistent with the view that the WDC can mitigate the

agency problem for aggressive tax avoiders. However, investors who focus more on the

future may hold the view that having access to tax havens suggests that these MNCs can

still engage in tax avoidance in the future, which does not help ﬁx the agency problem.

Therefore, we expect to see negative signs for the coefﬁcients on the triple interaction terms

in the sub-sample of MNCs headquartered in countries with long-term-oriented cultures,

and positive signs for the same triple interaction coefﬁcients on the sub-sample of MNCs

headquartered in countries with short-term-oriented cultures.

In Table 4, we present results on the effects of the WDC on stock market returns,

including the triple interaction with the tax haven dummy. Our goal is to investigate the

potentially differential response of the MNCs that have tax haven affiliates in their structure.

In Panel A, we show the results using MNCs headquartered in countries with cultures

that are more long-term-oriented, and in Panel B using MNCs headquartered in countries

with cultures that are oriented towards the short term. The coefficients of the three-way

interactions are significantly negative in Panel A, and mostly positive, but insignificant

in Panel B. In the long-term-oriented sub-sample, any improvement in the stock market

performance in response to the WDC (suggested by the positive coefficient on the term

treated =

× post =

1 that we estimate), is canceled out by having access to tax havens.

These results align with the definition of the Hofstede long-term orientation measure, i.e., a

culture’s tendency to focus on the future. Since the cultures oriented towards the long term

focus on the future, they view the access to tax havens as convenient future platforms for tax

avoidance. Hence, the WDC is likely ineffective in curbing agency problems and improving

information transparency. The short-term-oriented cultures, instead, are not concerned with

the future impacts of the access to tax havens the way their long-term counterparts are.

Table 4. Heterogeneity: access to tax havens.

(1) (2) (3) (4) (5)

Dep. Var Raw Ret Alpha US Alpha UK Abn Ret US Abn Ret UK

Panel A: MNCs from countries with long-term-oriented cultures

treated = 1 × post = 1 77.24 0.21 0.25 * 75.78 * 40.91

(1.59) (1.58) (1.83) (1.81) (0.99)

treated = 1 × post = 1× haven −122.39 *** −0.40 *** −0.41 ** −117.00 *** −89.17 **

(−2.59) (−2.61) (−2.49) (−2.85) (−2.20)

Observations 815 815 815 792 816

R-squared 0.602 0.557 0.539 0.353 0.311

Panel B: MNCs from countries with short-term-oriented cultures

treated = 1 × post = 1 1.20 0.04 −0.00 11.69 6.90

(0.13) (1.51) (−0.03) (1.14) (0.69)

treated = 1 × post = 1× haven 5.93 −0.01 0.01 2.88 3.26

(0.60) (−0.23) (0.20) (0.26) (0.31)

Observations 4783 4783 4783 4660 4660

R-squared 0.380 0.266 0.333 0.167 0.189

This table reports the estimated effects of the WDC on MNCs’ raw and abnormal returns in connection with an

MNC’s access to tax haven over the window of 2007–2013. t-statistics in parentheses. ***, **, * denote signiﬁcance

at the 1%, 5%, and 10% level, respectively.

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3.4. Occurrence of Extremely Negative Returns

To complement our investigation on the differential impacts of the WDC on the

stock market returns of the affected MNCs, we examine the occurrence of extremely

negative returns as an alternative outcome variable. As shown in Part b of Figure 1,

the dynamic effect of the reform on the occurrence of extremely negative returns for the

affected ﬁrms disappears in 2014. This time limit leads us to conduct a regression analysis

on the sub-samples of MNCs divided based on the long-term orientation dimension of

their headquarter countries’ cultures. We present the results in Table 5. In columns (1)

and (2), we report results using dummy variables indicating whether a “crash” type of

incident happens in a given year, and in columns (3) and (4) using the negative skewness

measures. In columns (1) and (3), we show the likelihood of an extremely negative incidence

benchmarked against the US market and in columns (2) and (4) against the UK market.

Panel A presents the results for MNCs headquartered in countries with long-term-oriented

cultures, while Panel B presents the results for MNCs headquartered in countries with

short-term-oriented cultures.

Table 5. Crash risk.

(1) (2) (3) (4)

Dep. Var Crash Risk US Crash Risk UK Neg Skew US Neg Skew UK

Panel A: MNCs from long-term-oriented cultures

treated = 1 × post = 1 0.17 0.23 0.69 * 0.65 *

(1.19) (1.60) (1.72) (1.74)

post −0.05 −0.08 ** −0.44 *** −0.48 ***

(−1.57) (−2.35) (−5.48) (−6.27)

MNC level controls ✓ ✓ ✓ ✓

Firm FEs ✓ ✓ ✓ ✓

Year FEs ✓ ✓ ✓ ✓

Observations 3984 3984 3984 3984

R-squared 0.021 0.027 0.052 0.066

Panel B: MNCs from short-term-oriented cultures

treated = 1 × post = 1 −0.07 ** −0.03 −0.20 ** −0.20 **

(−2.27) (−0.82) (−2.42) (−2.40)

post 0.34 ** 0.14 *** 1.30 *** 1.57 ***

(2.45) (3.12) (3.85) (2.81)

MNC level controls ✓ ✓ ✓ ✓

Firm FEs ✓ ✓ ✓ ✓

Year FEs ✓ ✓ ✓ ✓

Observations 5035 5035 5035 5035

R-squared 0.023 0.029 0.069 0.086

The dependent variable is one of the proxies for extremely negative returns.

CrashUK(US)

is based on whether

the ﬁrm-speciﬁc weekly return has dropped 3.2 standard deviation below the annual average in a particular

year estimated against FTSE100(S&P500).

NegSkewUK(US)

is the negative skewness of the weekly return in a

speciﬁc year estimated against FTSE100(S&P500). In all columns, we control for lagged logarithm of total assets,

book-to-market ratio, stock return, volatility, leverage, and ROA. In columns 1 and 3, we control for lagged

UK crash risk and in columns 2 and 4 we control for lagged US crash risk. t-statistics in parentheses. ***, **, *

denote signiﬁcance at the 1%, 5%, and 10% level, respectively. Two-way ﬁrm and year clustered standard errors

in parentheses.

Again, MNCs headquartered in countries with cultures with different levels of long-term

orientation behave differently. Previously, Kim et al. (2011) documented the association

of the occurrence of extremely negative returns with tax avoidance activities, and Bilicka

et al. (2022b) showed that the affected firms experience less occurrence of extremely negative

returns post WDC . We only find significant empirical results consistent with these previous

findings in the sample of MNCs headquartered in countries with short-term-oriented cultures.

The WDC significantly reduced the crash risk the affected MNCs were subject to, but only for

those MNCs headquartered in countries with short-term-oriented cultures.

J. Risk Financial Manag. 2024, 17, 102

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4. Conclusions

In this paper, we examine the differential stock market reactions to a change in anti-tax

avoidance regulations, depending on the national culture of the country where the MNC

is headquartered. Using the introduction of the Worldwide Debt Cap (WDC) reform in

2010 in the UK as a quasi-natural experiment, we examine the role played by the long-term

orientation dimension of national cultures in the impacts of the WDC on stock market

behaviors of the MNCs affected by the reform.

Consistent with the literature, we ﬁnd that MNCs affected by the reform were associ-

ated with higher subsequent stock market returns than their unaffected counterparts after

the reform; however, the effect disappeared after three years. This is consistent with the

evidence that multinational ﬁrms eventually moved debt and real operations away from

the UK in response to the reform, thereby diminishing the effects of this anti-tax avoidance

regulation. In line with the transient nature of the WDC’s impacts on the affected MNCs’

stock market performance, we ﬁnd that investors from countries with cultures oriented

towards the long term appear to recognize that these impacts can be short-lived. When

dividing our sample by the median of the Hofstede long-term orientation dimension of

the national culture, we ﬁnd that the positive stock market response to the WDC and

the decrease in occurrence of extremely negative returns are primarily driven by MNCs

headquartered in countries with short-term-oriented cultures. Cultures with different terms

of orientation also view the role of tax havens in this episode differently. Investors from

countries with long-term-oriented cultures focus more on the future, thereby viewing the

access to tax havens as a future potential to circumvent the anti-tax avoidance regulation.

Investors from countries with short-term-oriented cultures, by contrast, do not exhibit such

a future-oriented view.

From a policy perspective, we provide evidence on the extent of anti-tax avoidance

regulations’ effectiveness, focusing on the heterogeneous impact of these regulations, which

varies depending on differences in countries’ long-term orientation. We document that

the long-term orientation dimension of a country’s culture plays an important role in

explaining the cross-country variation in the stock market responses to the WDC. This

heterogeneous effect that depends on the forward-looking perspective of the investors

in a given country is important for policy makers as they consider implementing similar

anti-tax avoidance regulations in the future. As of January 2024, many countries have

started implementing a Global Minimum Tax to curb the global tax avoidance practices of

MNCs.

The evidence we provide in this paper highlights that regulations that limit proﬁt

shifting affect the stock returns of MNCs across countries differentially, and these effects

should be taken into account by policy makers as they implement these new regulations

targeting MNCs. While our goal in this paper is to make inferences about the general

effectiveness of anti-tax avoidance regulations, we acknowledge that this study focuses on

a single reform. Conducting a comparative analysis involving other anti-tax avoidance

regulations could offer additional insights on the effectiveness of such regulations in other

countries and further inform policy makers. This is beyond the scope of the current paper

but is a promising avenue for further research.

Finally, and more broadly, our findings not only advance the field of international finance,

but also have implications for how long-term beliefs affect asset prices in a global setting. This

addresses a key question in asset pricing research: the significance of incorporating investors’

long-run return expectations into asset pricing (Brunnermeier et al. 2020).

Author Contributions: Conceptualization, K.B., D.C.-S. and Y.Q.; methodology, D.C.-S.; software,

D.C.-S.; validation, K.B. and D.C.-S.; formal analysis, D.C.-S.; investigation, K.B. and D.C.-S.; resources,

K.B. and Y.Q.; data curation, K.B. and Y.Q.; writing—original draft preparation, D.C.-S.; writing—

review and editing, K.B. and D.C.-S.; visualization, K.B. All authors have read and agreed to the

published version of the manuscript.

Funding: This research received no external funding.

Data Availability Statement: Data can be provided upon request

J. Risk Financial Manag. 2024, 17, 102

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Conﬂicts of Interest: The authors declare no conﬂict of interest.

Notes

For instance, Beugelsdijk et al. (2021) present an overview of the business studies that have applied the Hofstede cultural

measures since 2006.

See https://geerthofstede.com/research-and-vsm/dimension-data-matrix/, accessed on 1 April 2022.

Raw Ret

is obtained by compounding monthly returns within each year.

Al pha UK(US)

is the CAPM alpha against FTSE100

(S&P500).

Abn Ret UK(US)

is the CAPM adjusted abnormal return against FTSE100 (S&P500) using

estimated from monthly

returns over the previous 36 months.

A “crash week” is deﬁned as a week when the ﬁrm-speciﬁc weekly return drops 3.2 standard deviations below their annual

mean value, with 3.2 chosen to generate a frequency of 0.1% in the normal distribution. The ﬁrm speciﬁc weekly return is deﬁned

iτ

= ln(

+ ϵ

iτ

)

, where

i,τ

is obtained from the regression of weekly return

on weekly market index returns

and its

leads and lags.

The negative skewness (Neg Skew) are computed as follows,

Neg Skew

= −[n(n − 1)

3/2

∑

iτ

]/[(n − 1)(n − 2)(

∑

iτ

)

3/2

]

where

iτ

is the ﬁrm-speciﬁc weekly return for ﬁrm

in week

, and n is number of available weekly returns in year

. The

negative skewness measures are also estimated against both FTSE100 and S&P500.

Bilicka et al. (2022b) show that before the WDC, the MNCs in the control group were in general signiﬁcantly larger, but did not

have signiﬁcantly different ROAs and leverage. There is also no signiﬁcant difference in the stock market performance between

control and treatment groups before the WDC, except for alphas in the US. Treated group is deﬁned as ﬁrms with gateway test

ratios above 75% in 2010, therefore has higher gateway test ratios, as expected.

The graphs in Figure 1 also suggest that there was no signiﬁcant difference in stock market performance between treated and

control groups before WDC. Standard errors of coefﬁcient estimates overlap in most years prior to the reform. Further, the lack of

differential trend evolution between treated and control group ﬁrms in years immediately after the ﬁnancial crisis, but before the

WDC reform, suggests that the ﬁnancial crisis affected all ﬁrms in our sample to a similar extent.

See https://www.oecd.org/tax/beps/summary-economic-impact-assessment-global-minimum-tax-january-2024.pdf, accessed

on 1 February 2024.

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