SSRN Id2889145

Strategic Reactions in Corporate Tax Planning
Christopher S. Armstrong†
carms@wharton.upenn.edu
Stephen Glaeser
stephen_glaeser@kenan-flagler.unc.edu
John D. Kepler
jkepler@wharton.upenn.edu
First Draft: January 15, 2016

This Draft: March 8, 2019
Abstract: We find that firms’ tax planning exhibits strategic reactions: firms respond to changes
in their industry-competitors’ tax planning by changing their own tax planning in the same
direction. We document evidence of these strategic reactions in two distinct research settings that
entail an exogenous increase and decrease in competitors’ tax planning. We also find evidence that
strategic reactions stem from concerns about appearing more tax aggressive than industry
competitors, some evidence that they stem from firms learning from the tax planning of their
industry competitors, and no consistent evidence that they stem from leader-follower dynamics.
Keywords: corporate income tax; tax planning; industry competition; strategic interaction; tax
havens; difference-in-differences; partially-overlapping groups; reflection problem
†
Corresponding author. We gratefully acknowledge financial support from the Wharton School of the University of
Pennsylvania and the Kenan Flagler Business School of the University of North Carolina. Armstrong also thanks EY
for its research support. We also acknowledge helpful comments and suggestions from Zhuoli Axelton, Anne Beatty,
Wayne Guay, Shane Heitzman, Jeff Hoopes, Sudarshan Jayaraman (referee), Urooj Khan, S.P. Kothari (editor), Aaron
Nelson, Stephanie Sikes, Jake Thornock, David Tsui, and the Wharton Accounting brownbag participants. We thank
Scott Dyreng for providing data on firms’ Irish operations, the locations of corporate subsidiaries, and the dates of
changes in state corporate tax laws. We thank Gerard Hoberg and Gordon Phillips for providing data on text-based
industry classifications.
Electronic copy available at: https://ssrn.com/abstract=2889145

1. Introduction
We examine whether firms adjust their own tax planning in response to their peers’ tax
planning. Prior game-theoretic and strategy studies show that many corporate decisions (e.g.,
R&D, advertising, and capital expenditures) can be characterized as strategic reactions that
describe how a firm’s decisions depend on the anticipated behavior of its peers (e.g., Fudenberg
and Tirole, 1984; Boone, 2000; Leary and Roberts, 2014).1
Prior tax planning studies have alluded to the possibility of strategic reactions by
suggesting that firms’ tax planning decisions may be influenced by managers’ desire to avoid
“standing out” from their peers (e.g., Mills et al., 1998; Rego, 2003; Graham et al., 2014;
Gallemore et al., 2014; Boning et al., 2018). For example, tax authorities’ audit and enforcement
policies that target firms with relatively extreme tax planning could induce a strategic component
to firms’ tax planning decisions. Similarly, the presence of customers or other stakeholders who
do not want to purchase from or contract with a firm whose tax planning is significantly different
from that of its competitors could also induce a strategic component to firms’ tax planning
decisions. In either case, firms may be less inclined to adopt risky tax positions if doing so might
cause their tax planning to seem particularly aggressive relative to that of their peers. Similarly,
managers considering tax strategies with greater adjustment costs, such as corporate inversions,
may be less inclined on the margin to implement the strategy if it would cause their tax planning
to seem particularly aggressive.
1
As we explain in greater detail in Section 2, strategic reactions are distinct from other types of competitive forces,
such as product market competition, in that strategic reactions arise when a firm chooses a particular attribute (e.g.,
its level of R&D, advertising, or tax planning) depending—at least in part—on what it expects its peers (e.g.,
competitors) to choose for the same attribute.
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The potential for strategic reactions in corporate tax planning has important implications
for researchers, legislators, regulators, and other stakeholders. For example, debates about the
benefit of policies designed to curb avoidance typically focus on the expected increase in tax
revenues from firms directly targeted by the policy.2 However, the presence of strategic reactions
implies that firms that are not directly affected by the policy will also change their tax planning in
response to policy-induced changes in their directly affected peers’ tax planning. To the extent that
tax authorities fail to consider these strategic reactions, they will arrive at inaccurate estimates of
the total effect of a given tax policy.
Relatedly, empirical studies of tax policy that fail to account for strategic reactions may
also produce systematically biased estimates of the policy’s direct effect. For instance, a common
research design for estimating the effect of a particular tax policy involves comparing the tax
planning of firms directly targeted by the policy—i.e., the treatment group—with that of firms that
are not directly targeted—i.e., the control group. This approach implicitly assumes that control
firms are unaffected by the policy (i.e., the stable unit treatment value assumption, Murnane and
Willett, 2010; Glaeser and Guay, 2017; Armstrong and Kepler, 2018).3 However, if there is a
strategic component to firms’ tax planning, this assumption is problematic since the tax policy can
still have an indirect effect on control firms as they respond to policy-induced changes in the tax
planning of their directly targeted counterparts. Consequently, empirical estimates of the direct
2
For example, https://www.finance.senate.gov/imo/media/doc/58198.pdf. Here, regulators focus on the lost revenues
due to corporations shifting income to the Cayman Islands. However, they do not consider the possibility that curbing
the avoidance of firms that take advantage of tax havens in the Cayman Islands may have indirect spillover effects on
these firms’ peers.
3
The stable unit treatment value assumption (SUTVA) requires no interference between units (e.g., firms), so that the
value of a unit’s outcome when exposed to the treatment is the same, regardless of the treatment status of other units.
See, e.g., Rubin (1986), Heckman et al. (1999), Horowitz and Manski (1995), Sobel (1996), Manski (2011), and
Armstrong et al. (2018a) for additional discussion.
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effect of tax policies will be understated if there are positive strategic reactions and, conversely,
overstated if there are negative strategic reactions.
Finally, theoretical studies of tax policy typically model corporate tax planning as a
strategic game between firms and regulators, ignoring potentially important strategic
considerations among firms (e.g., Desai, Dyck, and Zingales, 2007). However, modeling tax
planning as a zero-sum game between a single firm and the tax authority may be inadequate to the
extent there is a strategic component of firms’ tax planning decisions.
Despite multiple a priori reasons to expect strategic reactions in firms’ tax planning and
their potential importance for formulating and evaluating the efficacy of tax policy, prior work has
not investigated the possibility of strategic reactions in tax planning. One likely explanation for
this gap in the literature is that the inherently simultaneous nature of strategic reactions poses a
particularly difficult econometric challenge that Manski (1993) refers to as the “reflection
problem.” In the context of corporate tax planning, the reflection problem arises because peer firms
(e.g., firms in the same industry) are exposed to the same background characteristics (e.g., similar
product market competition) and tend to have similar firm-level characteristics (e.g., similar R&D
spending), both of which influence their tax planning. These similarities make it difficult to
isolate—or identify—firms’ strategic response to their peers’ tax planning, and vice versa.
We identify the extent to which firms’ tax planning contains a strategic component using
a partially-overlapping groups research design in two distinct research settings. This research
design isolates firms that are not directly exposed to a change in tax regulation that affects some
firms’ tax planning, but are indirectly exposed by way of shared industry membership with these
directly exposed firms (Bramoullé et al., 2010; De Giorgi et al., 2010). We follow prior work and
identify peer groups based on industry classifications that correspond to how regulators and other
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stakeholders either implicitly or explicitly benchmark firms against their industry competitors
(e.g., Leary and Roberts, 2014; Bozanic et al., 2017). The extent to which firms with no direct
exposure to an exogenous change in tax policy respond to changes in their directly exposed
industry competitors’ tax planning triggered by the policy change reflects the strategic component
of tax planning.
Our first research setting focuses on the significant corporate tax rate cuts in Ireland (from
32% to 12.5%) that occurred between 1998 and 2003. These tax cuts provide a powerful source of
arguably exogenous variation in the tax planning of U.S. multinational firms with operations in
Ireland (“Irish-haven firms”), as many of these firms shifted income to Ireland to take advantage
of the lower tax rate.4 Although Irish-haven firms’ industry competitors that had no Irish operations
were not directly affected by the Irish tax cuts, they were, nevertheless, indirectly exposed by way
of their shared industry membership with Irish-haven firms. Consequently, the extent to which
these indirectly exposed firms altered their tax planning in response to changes in their Irish-haven
competitors’ tax planning captures the strategic component of corporate tax planning. 5
Our second research setting uses an arguably exogenous decrease in certain firms’ ability
to engage in tax planning. In particular, we follow Dyreng et al. (2013) who describe and document
how firms use Delaware as a domestic tax haven. Because Delaware does not tax income from
intangible assets, firms can reduce their state tax liabilities by transferring intangible assets to
4
See, e.g., the 2000 OECD report on identifying and eliminating harmful tax practices (“Towards Global Tax Co-
operation,” available at https://www.oecd.org/tax/harmful/2090192.pdf), the related discussion in Hanlon and
Heitzman (2010), and articles in the business press, such as https://www.bloomberg.com/graphics/2016-apple-profits/.
5
To illustrate our partially-overlapping groups research design in the Irish-haven setting, assume that directly-exposed
Irish-haven firms experience an 8% increase in their tax planning following the Irish rate cuts, comprised of the
following: 3% directly due to the Irish tax cuts, 2% due to common industry factors, and 3% due to other
macroeconomic factors. Further suppose that the indirectly exposed competitors of the Irish-haven firms strategically
react by changing their own tax planning by 2%. In addition, because they are in the same industry, they also
experience the common 2% industry effect and the 3% macroeconomic effect. The control firms in this example only
experience the 3% macroeconomic effect (plus any of their own industry effects, which is assumed to be the same as
the industry effect for the treatment firms, in expectation, under the parallel trends assumption).
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Delaware subsidiaries and making royalty payments from their non-Delaware subsidiaries for the
use of these assets. Dyreng et al. (2013) also explain how (and when) many states changed their
tax policies to curtail firms’ ability to use Delaware subsidiaries to avoid taxes. We use these
changes in various states’ corporate tax policies as a series of staggered exogenous shocks that
directly reduced targeted firms’ ability to avoid taxes, to which their unexposed industry
competitors should have responded if there are strategic reactions in corporate tax planning.
In both research settings, we find evidence that firms’ tax planning has a positive strategic
effect on competitors’ tax planning using several common empirical measures of tax planning,
including GAAP effective tax rates (ETRs), Cash ETRs, long-run GAAP and Cash ETRs in the
Irish setting, and state ETRs in the Delaware setting. Our evidence suggests that this positive
strategic effect exists for both increases and decreases in competitors’ tax planning. In the Irish
setting, we find that firms increase their tax planning in response to an exogenous increase in their
competitors’ tax planning. Conversely, in the Delaware setting we find that firms decrease their
tax planning in response to an exogenous decrease in their competitors’ tax planning. We adopt
game-theoretic terminology and refer to these positive, symmetric strategic reactions as strategic
complementarities in firms’ tax planning (Bulow et al., 1985).
Our estimates of the magnitude of the strategic complementarities are economically
significant and comparable to those from related studies that examine the role of other competitive
forces (e.g., product market competition) that shape firms’ tax planning (e.g., Kubick et al., 2014;
Donohoe et al., 2015). For example, our results suggest that firms’ ETRs decrease (increase) by
roughly 0.63 (0.27) percentage points in response to a one percentage point decrease (increase) in
their competitors’ ETRs. In terms of dollar magnitude, estimates from the Irish setting imply that
firms’ strategic reaction to changes in their competitors’ tax planning represent a reduction in
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annual cash taxes paid and income tax expense of approximately $6.5 and $5.9 million,
respectively (corresponding to a 3.2 percentage point reduction in their Cash ETR and a 2.9
percentage point reduction in their GAAP ETR).6
Having documented evidence of economically significant strategic complementarities in
multiple measures of corporate tax planning in two distinct research settings, we turn our attention
to identifying the specific mechanism(s) through which these strategic effects arise. Prior studies
suggest that firms may seek to avoid drawing unwanted scrutiny from tax authorities or incur
reputational costs with stakeholders (Graham et al., 2014; Bozanic et al., 2017; Boning et al.,
2018). Anecdotal evidence also suggests that firms that “stand out” in their industry by having
relatively extreme or conspicuous levels of tax planning are more likely to be audited by tax
authorities or face legislative and regulatory scrutiny (Heitzman and Ogneva, 2018).7 Consistent
with firms’ concerns about appearing overly aggressive relative to their competitors inducing
strategic complementarities in tax planning, we find evidence that tax aggressive firms are more
responsive to changes in their competitors’ tax planning.
Additionally, we find some evidence that less tax aggressive firms are responsive to
changes in their competitors’ tax planning. This evidence is consistent with the strategic
complementarities in tax planning partially resulting from firms learning about new avoidance
6
As we explain in more detail below, this result is consistent with firms exhibiting stronger strategic reactions to
increases in competitors’ tax planning, potentially because firms are more willing to increase rather than decrease their
tax planning. However, as we also explain, this inference should be interpreted cautiously since these estimates are
not structural and therefore depend on the economic, policy, and other prevailing conditions in the research settings.
7
For example, the IRS describes its audit process as follows: “Computer programs give each return numeric ‘scores’.
The Discriminant Function System (DIF) score rates the potential for change, based on past IRS experience with
similar returns. The Unreported Income DIF (UIDIF) score rates the return for the potential of unreported income.
IRS personnel screen the highest-scoring returns, selecting some for audit and identifying the items on these returns
that are most likely to need review” (https://www.irs.gov/newsroom/the-examination-audit-process). The predictors
that are used in these “computer scoring” systems are at least partially based on the income distributions within
company activity codes (See p. 2 of https://www.irs.gov/pub/irs-soi/puidif2.pdf). The activity codes used to classify
firms are very similar to—if not effectively the same as—SIC codes, which is precisely how we identify firms’
industry competitors in our primary analyses (See pp. 17-18 of https://www.irs.gov/pub/irs-pdf/i1040sc.pdf).
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strategies and/or inferring the “acceptable” amount of tax planning by observing their competitors’
tax planning (Brown, 2011; Brown and Drake, 2013). However, we do not find consistent evidence
that smaller firms are more responsive to changes in the tax planning of their larger, and
presumably better informed, industry competitors in a “leader-follower” relation (e.g., Leary and
Roberts, 2014; Xiao, 2017).
Finally, because of the inherent difficulty in credibly identifying strategic reactions (e.g.,
Angrist, 2014), we conduct a “falsification test” to assess the robustness of our inferences to
alternative explanations. We do so by repeating each of our primary difference-in-differences
analyses using firms’ pre-tax financial performance as the dependent variable. Pre-tax financial
performance should not exhibit strategic reactions in our setting because the mechanisms that drive
strategic reactions in firms’ tax planning directly affect the costs and benefits of tax planning, but
not the costs and benefits of pre-tax financial performance. Furthermore, in the absence of
unresolved agency conflicts, firms should always try to maximize pre-tax firm performance and
there is no obvious reason why firms would willingly reduce their pre-tax income in response to
reductions in competitors’ tax planning. Therefore, we should also find evidence of spurious
strategic reactions in their pre-tax performance if the strategic complementarities that we document
are an artefact of an endogenous relation among industry competitors’ tax planning. Supporting
the validity of our inferences, we find no evidence of strategic reactions in firms’ pre-tax net
income in either research setting.
In addition to the potential importance for formulating and evaluating the efficacy of tax
policy, our evidence of strategic reactions contributes to the literature by documenting an
important determinant of corporate tax planning (see Wilde and Wilson, 2018 for a review). We
also contribute to the emerging literature that examines the role of “peer” and “network” effects
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on various corporate attributes (e.g., Beck et al., 2014; Leary and Roberts, 2014; Bird et al., 2018).
Studies in this literature have found that managers and directors of peer firms play a role in shaping
their firm’s policies via social interactions (e.g., changes in social norms). We contribute to this
literature by providing evidence that competitors’ (or “peers’”) decisions can affect firms’
decisions not only through social interactions, but also by way of any monetary costs and benefits
associated with strategic interactions.
The remainder of our paper is as follows. Section 2 provides the theoretical background
and motivation for our study. Section 3 describes our two complementary research designs. Section
4 describes our data, sample construction, and variable measurement. Section 5 presents our results
and Section 6 concludes.
2. Background and Motivation
2.1. Strategic reactions in corporate tax planning
A long line of game-theoretic studies highlights the role of strategic reactions in corporate
decisions, whereby economic agents’ decisions are not made in isolation, but rather account for
the anticipated behavior of other economic agents (e.g., Diamond and Dybvig, 1983; Fudenberg
and Tirole, 1984; Morris and Shin, 1998). A central result in this literature is that in a strategic
setting, a firm’s optimal decision is characterized as a reaction curve, which is a function that
describes the firm’s best response to the anticipated behavior of its peers—which are typically
interpreted as its competitors. Firms with downward-sloping reaction curves will make decisions
that vary inversely with their competitors’ expected decisions, and these decisions are described
as “strategic substitutes.” Conversely, firms with upward-sloping reaction curves will make
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decisions that vary in the same direction as their competitors’ expected decisions, and these
decisions are described as “strategic complements.”
There are several reasons to believe that corporate tax planning might exhibit strategic
reactions in general, and strategic complementarities in particular. For example, if firms incur
“political costs” or are subject to enforcement on a relative basis, then a firm that wishes to avoid
being “singled out” would ensure that its tax planning closely conforms to that of its industry peers
(Zimmerman, 1983; Dyreng et al., 2016b). Graham et al.’s (2014) survey of nearly 600 corporate
tax executives corroborates this conjecture: respondents rank public reputational concerns and the
risk of IRS detection as the second and third most important considerations that would prevent
them from pursuing a tax planning strategy.
Firms may also be able to learn new avoidance strategies by observing their competitors’
tax planning. In this case, strategic complementarities would arise because competitors’ tax
planning reduces the firm’s own cost of learning new tax planning strategies or the degree of tax
planning that is unlikely to draw unwanted regulatory or public scrutiny. Consistent with learning
in corporate tax planning, Brown (2011) and Brown and Drake (2013) present evidence that tax
planning strategies propagate through board connections and Cen et al. (2018) present evidence
that tax planning strategies propagate along supply chains.
Finally, firms may mimic or copy the decisions of their industry competitors who are
thought to be better informed about the efficient—or acceptable—level of tax planning (i.e.,
“leader-follower” dynamics). Consistent with firms mimicking industry leaders, Kubick et al.
(2014) find that product market leaders engage in more tax planning, and that firms mimic their
industry competitors’ tax planning (see also Donohoe et al., 2015, who find that competition from
tax-advantaged banks leads to an increase in the tax aggressiveness of other banks).
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Our study differs from Brown (2011), Brown and Drake (2013), Kubick et al. (2014), and
Donohoe et al. (2015) in several important ways. First, evidence from our mechanism and
falsification tests suggests that our results do not primarily reflect learning or leader-follower
dynamics, but instead primarily reflect concerns about enforcement or reputation. Second, while
these other studies document whether changes in the opportunities for learning or changes in
product market competition lead to changes in firms’ tax planning, our study examines whether
direct changes in competitors’ tax planning causes changes in a firm’s own tax planning, and vice
versa. Consequently, unlike our study, these studies do not speak to the existence and magnitude
of strategic reactions.
Our study is closest to Bird et al. (2018), which relies on manager fixed effects estimated—
i.e., identified—using managers who change firms within the sample of Execucomp firms as a
source of plausibly exogenous variation in peer firms’ tax planning. They find evidence of peer
effects in GAAP ETRs, but not Cash ETRs, and conclude that peer effects operate via earnings
management incentives. In contrast to their findings, we document evidence of strategic
complementarities in multiple measures of tax planning, including Cash and State ETRs. Our
evidence also suggests that enforcement herding is one mechanism that is responsible for
producing these strategic complementarities.
2.2. The reflection problem
The inherently simultaneous nature of strategic reactions makes it challenging to
empirically identify these effects. Manski (1993) refers to these econometric issues as the
“reflection problem,” which he explains in the context of the following linear-in-means model:
Yi   0  Y Y j   X' X i   X' X j   Z' Z j   i , (1)
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where i indexes the firm and j indexes the firm’s reference group (e.g., industry). Yi is the outcome
of interest (e.g., tax planning) for firm i, 𝑌̅𝑗 is the average outcome of the firms in firm i’s reference
group j, 𝑋𝑖 is a vector of firm-level characteristics of firm i, 𝑋̅𝑗 is the average value of these
characteristics for the firms in firm i’s reference group j, and 𝑍𝑗 is a vector of reference group-level
characteristics that have the same values for all of the firms in firm i’s reference group.
Manski (1993) categorizes the determinants of outcome 𝑌𝑖 into three mutually exclusive
groups, which we now describe in our specific context of corporate tax planning. First, firms in
the same industry can exhibit similar levels of tax planning because they share a common industry
environment. For example, firms in the same industry can have similar tax planning opportunities,
such as specific income tax credits based on their particular line of business (e.g., energy, utilities,
and pharmaceuticals). As another example, firms in the same industry could face similar
competitive forces that lead them to adopt similar strategies (e.g., Kubick et al., 2014; Donohoe et
al., 2015) that manifest in empirical measures of tax planning (e.g., GAAP ETR). Manski refers to
this source of similarity as exogenous effects, which are captured by the coefficients on 𝑍𝑗 .
Second, firms in the same industry can exhibit similar tax planning because their individual
(i.e., firm-level) characteristics are correlated with each other. For example, firms in the same
industry tend to have similar capital structures, performance, and risk profiles, which can affect
their tax planning. Manski refers to this source of similarity as correlated effects, which are
captured by the coefficients on 𝑋̅𝑗 .
Third, a firm’s tax planning may vary with the tax planning of the other firms in its industry
because of a direct strategic reaction, which is referred to as an outcome-on-outcome effect, and is
captured by the coefficient on 𝑌̅𝑗 . Outcome-on-outcome effects describe how a firm’s tax planning
is directly affected by the tax planning of the other firms in its industry, beyond any similarity
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induced by common exposure to industry-level forces (i.e., exogenous effects) and similarities in
firm-level characteristics within industries (i.e., correlated effects).
Manski explains how empirically identifying strategic reactions is complicated because the
average outcome in the firm’s industry, 𝑌̅𝑗 , is a linear combination of competitors’ exogenous and
correlated effects. This introduces two distinct identification problems. The first is the well-known
endogeneity problem related to potentially omitted correlated effects. Second, even if there are no
omitted correlated effects, the resulting linear dependence makes it difficult to separately identify
direct strategic reactions (i.e., outcome-on-outcome effects). However, one solution for the
reflection problem is the same as that for identifying the effect of an endogenous variable in
general: namely identifying a source of variation in competitors’ tax planning that is otherwise
exogenous with respect to the firm’s own tax planning. We adopt this approach for breaking the
simultaneity associated with the reflection problem and we describe how we do so in detail in
Section 3. However, we first provide a brief overview of several alternative approaches that are
also capable of providing insight and drawing inferences in the presence of the reflection problem.
2.3. Alternative designs for identifying strategic reactions8
Because of the growing interest in identifying strategic effects in a variety of settings and
the difficulty of reliably identifying exogenous sources of variation, we provide a brief discussion
of several alternative approaches for addressing the reflection problem in the absence of a credible
source of exogenous variation in peer behavior. These techniques differ in their assumptions and
data requirements and, in turn, their ability to detect, capture, isolate, and identify strategic
8
Our discussion in this section draws heavily on Ioannides (2006), Durlauf and Ioannides (2010), and Blume et al.
(2011). We refer interested readers to those papers and the references therein for a more exhaustive treatment of
identifying strategic effects, the reflection problem, and the various techniques that we discuss.
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reactions. Our brief survey of these alternative techniques also provides insight into the nature of
the reflection problem and the intuition for our identification strategy.
2.3.1. “Coarsening” the unit of analysis
A relatively simple approach is to redefine the unit of analysis at a higher level (e.g.,
industries rather than firms). By “coarsening” the unit of analysis, the resulting (aggregate)
variables will capture any strategic reactions that occur at that and lower levels of analysis.
Although this approach might not be suitable for answering certain research questions, it may
nevertheless provide insight into the existence and nature of any strategic reactions. For example,
in our setting, this approach might be capable of identifying certain industries that exhibit larger
or stronger strategic reactions, although quantifying the magnitude of the strategic reactions may
not be feasible.
2.3.2. Exclusion of certain group-level averages as contextual effects
A necessary condition for identification is the existence of at least one individual
characteristic whose group-level average is not a contextual effect, which is analogous to the row
condition for identification in a simultaneous equations system (Brock and Durlauf, 2001a;
Durlauf and Ioannides, 2010, p. 459). Therefore, if the group-level averages of certain individual
characteristics can be justifiably excluded, this can be used to identify peer effects. Grinblatt et al.
(2004) use this approach to show that individuals’ car purchases are influenced by their neighbors’
car purchases. They do so by excluding the neighborhood averages of demographic characteristics
as contextual effects by arguing that there is no reason why the average age of an individual’s
neighbors should directly affect the individual’s preferences for different types of cars.
2.3.3. Non-linear and dynamic models
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Since the reflection problem arises from linear dependence between group outcomes and
certain group-level aggregates, non-linear-in-means models are not susceptible to this concern
(Brock and Durlauf, 2001a). Relatedly, Brock and Durlauf (2001b) derive a dynamic linear model
that does not exhibit the reflection problem since it avoids linear dependence between the
contextual and endogenous variables. Despite the potential promise of non-linear and dynamic
identification, Durlauf and Ioannides (2010, p. 459) caution that these approaches rely on
parametric identification and are therefore potentially sensitive to the assumed functional form.
2.3.4. Variance-based approaches
Glaeser et al. (1996; 2003) and subsequent authors rely on the existence of “social
multipliers”—whereby endogenous interactions amplify differences in average group behavior—
to provide estimates of strategic reactions based on group-level data. For example, Glaeser et al.
(1996) use city-level crime data, coupled with the intuition that social interactions will slow the
convergence of sample means, to estimate the magnitude of cross-city differences in crime rates
beyond that explained by city-level characteristics. They argue that the covariance of per capita
crime rates across a city’s residents generates over-dispersion in cross-city crime rates relative to
the absence of social interactions. Glaeser et al. (1996) show that this measure is largest for petty
crimes, moderate for more serious crimes, and negligible for the most serious crimes. Because the
statistic is related to the expected size of the interacting group of criminals, their results suggest
that more serious crimes are associated with smaller group interactions. 9
3. Research Design
9
See also Graham (2008), who proposes a method to identify social interactions using conditional variance
restrictions.
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Our research designs identify the extent to which similarities in the tax planning of firms
in the same industry are the result of their strategic response to their industry competitors’ tax
planning. We develop a model of corporate tax planning that is similar to the specification used in
prior corporate finance studies that examine within-industry strategic interactions (e.g., Rajan and
Zingales, 1995; Leary and Roberts, 2014). In particular, we model a firm’s tax planning as a
function of (i) its own firm-level characteristics, which are likely to be similar to those of other
firms in its industry (i.e., correlated effects), (ii) its common industry-level characteristics, which
are shared by the other firms in its industry (i.e., exogenous effects), and (iii) its industry
competitors’ tax planning (i.e., outcome-on-outcome effects). This last effect is our object of
interest, and it represents a firm’s strategic response to its industry competitors’ tax planning.
As noted in Section 2, it is challenging to empirically identify direct (i.e., outcome-on-
outcome) strategic reactions because of the risk of correlated omitted variables (Angrist, 2014;
Gormley and Matsa, 2014; Leary and Roberts, 2014). Further, the reflection problem implies that
even in the absence of correlated omitted variables, the simultaneous nature of strategic
reactions—firms responding to their competitors, and vice versa—produces near perfect
collinearity between a firm’s characteristics and its competitors’ tax planning (Manski, 1993;
Blume and Durlauf, 2005; Blume et al., 2015).
To break the simultaneity inherent in the reflection problem we develop a partially-
overlapping groups research design that uses changes in tax policy that directly affect one group
of firms as an exogenous source of variation that should indirectly affect the tax planning of
partially-overlapping members of the other group (Bramoullé et al, 2010; De Giorgi et al., 2010).
To the extent the tax policy changes are exogenous with respect to the members of the other group,
they should have no direct effect on the overlapping group members, thus providing a way to break
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the simultaneity inherent in the reflection problem. We use this research design in two different
research settings: one that involves an exogenous increase and one that involves and exogenous
decrease in certain firms’ tax planning. Importantly, by examining both an exogenous increase and
an exogenous decrease in tax planning, we can assess whether there is symmetry in any strategic
effects that we document (e.g., whether there are strategic complementarities for both increases
and decreases in tax planning).
3.1. Partially-overlapping groups difference-in-differences design: Irish-haven
Our first research setting uses significant corporate tax rate cuts in Ireland as an arguably
exogenous source of variation in firms’ tax planning. In December of 1997, Ireland’s finance
minister introduced legislation that implemented a phased reduction of the then 32% corporate tax
rate to 12.5%, by January 1, 2003. This led to a large increase in the tax planning of multinational
U.S. firms with operations in Ireland (“Irish-haven firms”), as many of these firms shifted income
to Ireland to take advantage of the lower tax rate. To the extent Irish-haven firms have industry
competitors without Irish operations—and who were therefore not directly affected by the Irish
tax cuts—these competitors should alter their tax planning if there are strategic complementarities
in corporate tax planning.
In this research setting, the first group consists of Irish-haven firms, which partially overlap
with the second group—wholly-domestic firms with only U.S. operations—based on shared
industry membership. Changes in Irish tax rates should have no direct effect on the tax planning
of wholly-domestic firms, but should have an indirect effect to the extent these firms strategically
respond to changes in their Irish-haven competitors’ tax planning. Wholly-domestic firms that
partially overlap with Irish-haven firms via common industry membership form the treatment
group, and wholly-domestic firms with no overlap with Irish-haven firms form the control group.
- 16 -

Figure 1 graphically illustrates how treatment and control groups are constructed in this setting (as
well as which firms are explicitly withheld from our sample in this research design).
To ensure that this test isolates strategic reactions to changes in Irish-haven firms’ tax
planning, we only include firms without foreign assets or foreign sources of income in the sample
(i.e., both “treatment” and “control” firms are wholly domestic). This restriction ensures that the
firms in this test are not directly affected by the Irish tax cuts, but are only indirectly affected
through their strategic reactions to their directly exposed industry competitors. We then estimate
the following difference-in-differences specification:
Tax Planningijt = α + β1 Treated Irish Exposureij

+ β2 Post Rate Cut × Treated Irish Exposureij + θ Firm Controlsit-1
+ φ Industry Controls-ijt-1 + δt + εijt, (2)
where Tax Planning is one of several alternative measures of corporate tax planning that we
describe in more detail below, and the i and j subscripts again refer to firms and industries, and the
t subscript refers to years. Firm Controls is a vector of the determinants of tax planning drawn
from prior work (e.g., Hanlon and Heitzman, 2010; Armstrong et al., 2012), which we define in
Appendix A. We measure all controls at the end of the fiscal year. Industry Controls are the
industry-year market-weighted average of the determinants of tax planning, calculated excluding
firm i.
In our initial estimation of Eq. (2), we include year fixed effects, 𝛿𝑡 , to control for common
shocks in each year and general time trends in tax planning (Dyreng et al., 2016a). We also
separately estimate Eq. (2) with industry-year and firm fixed effects to assess whether similar
inferences obtain using within-firm and within-industry-year variation, respectively. However, our
primary inferences are based on estimates from the specification that includes only year fixed
effects, as the construct of strategic reactions includes a cross-sectional component. Accordingly,
including only year fixed effects preserves most of the relevant variation and provides a more
- 17 -

powerful test of strategic effects, albeit at the expense of not confining the analyses to within-firm
and within-industry-year variation.10
We include an indicator, Treated Irish Exposure, which equals one if the firm has industry
competitors with Irish operations. Treated Irish Exposure controls for time-invariant differences
between firms with Irish-haven competitors and firms without Irish-haven competitors. We use
the Exhibit 21 data described in Dyreng and Lindsey (2009) to identify firms with Irish-haven
operations. 11 Post Rate Cut is an indicator that equals one after 1998 and delineates the period after
indirectly affected firms had an opportunity to react to Irish-haven firms’ responses to the
December 1997 announce that Ireland would progressively lower its corporate tax rate. The
coefficient on Post Rate Cut × Treated Irish Exposure in Eq. (2) captures the component of firms’
tax planning that represents a strategic reaction to their industry competitors’ tax planning.
A positive coefficient on Post Rate Cut × Treated Irish Exposure implies that wholly-
domestic firms with Irish-haven industry competitors decreased their tax planning following the
Irish tax cuts, relative to their wholly-domestic counterparts without Irish-haven industry
competitors (as we discuss in Section 4, all of our measures of Tax Planning are decreasing in the
level of a firm’s tax planning). Because wholly-domestic firms with Irish-haven industry
competitors witnessed an increase in their industry competitors’ expected tax planning, a positive
relation would be evidence of strategic substitution in corporate tax planning. Conversely, a
negative relation would be evidence of strategic complementarities in corporate tax planning.
Finally, failing to find a relation would be evidence that firms make their tax planning decisions
10
Roberts and Whited (2013, p. 559) caution against “overusing” fixed effects because (i) using the economic
magnitude of pooled OLS coefficient estimates are often more conducive for drawing qualitative inferences, (ii)
including fixed effects can exacerbate measurement error, and (iii) certain fixed effects structures may inadvertently
eliminate the variation that is of inherent interest to a particular research question.
11
Available on Scott Dyreng’s website: https://sites.google.com/site/scottdyreng/Home/data-and-code. We thank the
authors for making these data publicly available.
- 18 -

in a non-strategic fashion, or that our tests lack sufficient power to reliably detect any strategic
reactions.
3.2. Partially-overlapping groups differences-in-differences design: Delaware-haven
Our second research setting uses the staggered adoption of state tax policies designed to
curb inter-state tax planning as an arguably exogenous source of variation in affected firms’ tax
planning. This research setting complements the Irish setting in that it entails a decrease rather
than an in increase in firms’ tax planning. The collective results from these two different settings
allows us to assess whether there is symmetry in firms’ strategic reactions to their competitors’ tax
planning (e.g., whether firms respond to both increases and decreases in their competitors’ tax
planning). Moreover, examining two distinct sources of exogenous variation in firms’ tax planning
also allows us to draw stronger inferences and reduces the likelihood that our results are either
spurious or due to omitted correlated variables. It also allows us to estimate multiple local average
treatment effects (LATEs), enhancing the generalizability of our inferences (Glaeser and Guay,
2017).
We follow Dyreng et al. (2013), who describe and document Delaware’s role as a domestic
tax haven. In particular, Dyreng et al. explain how firms can transfer intangible assets to Delaware
subsidiaries and make royalty payments from non-Delaware subsidiaries for the use of these assets.
Because Delaware does not tax income earned from intangible assets, these royalty payments are
not subject to Delaware taxation. However, since these royalty payments are deductible, they
reduce the taxable income of non-Delaware subsidiaries. Dyreng et al. (2013) refer to this income-
shifting strategy as the Delaware Passive Investment Company, or Delaware PIC, strategy. They
argue that firms with a large number of Delaware subsidiaries and valuable intangible assets, or
Delaware PIC firms, are likely to be taking advantage of this strategy. Consistent with their
- 19 -

conjecture, they find that Delaware PIC firms have state effective tax rates that are between 15 and
24 percent lower than otherwise similar firms.
Dyreng et al. (2013) also discuss how states have responded to the erosion of their tax base
from the widespread use of the Delaware PIC strategy. In particular, they explain how states either
started to require combined reporting or enacted the economic nexus doctrine to curtail firms’
ability to use the Delaware PIC strategy. Combined reporting requires firms to include the net
profits of all of their subsidiaries in a combined tax return, preventing—or, at a minimum, severely
limiting—the inter-company transfer payments that are essential for the Delaware PIC strategy.
The economic nexus doctrine requires firms to pay taxes based on their economic presence (or
“nexus”), which allows states to tax the royalty income that would otherwise escape taxation by
being transferred to Delaware. Dyreng et al. (2013) find that the adoption of combined reporting
or the economic nexus doctrine led to large reductions in the state tax planning of Delaware PIC
firms, as evidenced by a relatively large increase in these firms’ state effective tax rates.
We use the staggered adoption of combined reporting and the economic nexus doctrine in
various states at different times as a series of exogenous shocks that curtailed the tax planning of
Delaware PIC firms. Figure 4 provides a map that illustrates the timing of states’ adoption of these
measures. To the extent that Delaware PIC firms had competitors that did not have Delaware
subsidiaries—and therefore were not directly affected by the changes in the state tax policies—
these competitors should have altered their tax planning if there is a strategic component of
corporate tax planning. In this application of a partially-overlapping groups research design, the
first group consists of Delaware PIC firms that partially overlap with the second group, non-
Delaware subsidiary firms, based on shared industry membership. Firms with no Delaware
subsidiaries (i.e., no direct exposure) that have Delaware PIC firms in their industry (i.e., indirect
- 20 -

exposure) form the treatment group, and firms with neither Delaware subsidies nor Delaware PIC
firms in their industry (i.e., neither direct nor indirect exposure) form the control group.
Finally, we aggregate subsidiaries at the firm level for this analysis rather than use
disaggregated subsidiary-firm-level data. We do so for several reasons. First, subsidiary-level
measures of tax planning are not available. Second, a partially-overlapping groups design at the
subsidiary level would require the exclusion of firms with Delaware subsidiaries (analogous to our
exclusion of firms with foreign operations in the Irish setting). However, since the vast majority
of U.S. corporations have Delaware subsidiaries, excluding these firms would result in a highly
restricted sample that would severely limit the generalizability of our inferences. 12
Following Dyreng et al. (2013), we use the location of a firm’s subsidiaries in various states
to measure the firm’s economic presence in those states. Although we do not exclude firms with
Delaware subsidiaries, we do exclude these firms’ Delaware subsidiaries from the analysis. 13 We
estimate the following differences-in-differences specification at the firm level:
State ETRijt = α + β1 Avg(Competitor DE PICijt) + β2 Avg(Competitor Post Lawist)

+ β3 Avg(Competitor DE PICijt × Competitor Post Lawist)
+ β4 Avg(Own DE PICist) + β5 Avg(Own Post Lawist)
+ β6 Avg(Own DE PICist × Own Post Lawist) + θ Firm Controlsit-1
+ φ Industry Controls-ijt-1 + Ψ Avg(State Controlsit-1)
+ Γ Avg(Competitor State Controls-ijt-1) + δrt + εijt, (3)
We include an indicator, Competitor DE PIC, that equals one if the subsidiary has an in-state
industry competitor that is capable of utilizing the Delaware PIC strategy. We assume that a firm
is capable of utilizing the Delaware PIC strategy if it has both a relatively large number of
Delaware subsidiaries (those in the upper third of the sample in a given year) and relatively high
12
Approximately 70% of the firms in our sample have at least one Delaware subsidiary, which is slightly more than
the approximately 60% of firms in Dyreng et al.’s (2013) sample.
13
Dyreng et al. (2013) find that about half of all subsidiaries are located in Delaware, which suggests that the
proportion of Delaware subsidiaries does not reflect firms’ true economic presence. To the extent that the location of
firms’ other subsidiaries also does not reflect their true economic presence, the resulting measurement error, if
anything, should bias against finding evidence of either positive or negative strategic reactions.
- 21 -

intangible assets (those with above median market-to-book ratios in a given year). Our definition
follows that of Dyreng et al. (2013), except that we do not require a minimum number of
subsidiaries in states that require combined reporting or follow the economic nexus doctrine.
Instead, we include an indicator, Post Law, that equals one if the state requires combined reporting,
follows the economic nexus doctrine, or both.14
We allow the year fixed effects in Eq. (3) to differ for each of the eight U.S. Bureau of
Economic Analysis (BEA) regions of firms’ headquarters to ensure that the specification compares
firms with similar geographic activity (𝛿𝑟𝑡 ).15 We include a vector of state controls, Ψ, which
includes GSP Growth, State Corporate Tax Rate, and State Personal Tax Rate (Armstrong et al.
2018b). We also require industry competitors to operate in the same state for Competitor DE PIC
to equal one because we expect all of the mechanisms that we consider to operate based on shared
tax jurisdictions. 16 We also augment Eq. (3) with state-year, industry-year, and firm fixed effects—
both separately and simultaneously—to assess the sensitivity of our inferences to using variation
within firms, industry-years, and state-years, respectively. However, we continue to estimate
subsequent variants of Eq. (3) for our mechanism, falsification, and robustness tests using region-
year fixed effects to ensure that the specification captures the cross-sectional component of
strategic effects.
14
Note that economic nexus and combined reporting requirements are not necessarily laws in the statutory sense.
However, we refer to them as “laws” for concision and because Post Law is common nomenclature in differences-in-
differences research designs that examine the effect of laws, regulations, or court rulings.
15
We are able to include Post Law and region-year fixed effects together because different states began to require
combined reporting or began to follow the economic nexus doctrine at different times (i.e., there is staggered
adoption).
16
For example, we expect enforcement herding in this setting to operate via the actions of common state tax regulators,
customers, media, and other stakeholders (e.g., a firm that only has operations in California will not expect changes
in its competitors’ tax planning in New York to affect the probability it is targeted by the California Franchise Tax
Board).
- 22 -

The prefix Avg refers to subsidiary-weighted averaging across non-Delaware subsidiaries.
For competitor variables, we average across all non-Delaware subsidiaries in the firm’s industry,
excluding the firm’s own subsidiaries. For variables with the prefix Own, we average over the
firm’s own non-Delaware subsidiaries. We then take the subsidiary-weighted average of the
interaction terms after calculating the interactions.
The coefficients on Avg(Own DE PIC) and Avg(Own Post Law) measure whether the firm
is capable of taking advantage of the Delaware PIC strategy and the firm’s direct exposure to
various states’ attempts to neutralize the strategy, respectively. The coefficient on Avg(Own DE
PIC × Own Post Law) measures the traditional differences-in-differences estimate of the effect of
states’ policies to neutralize the Delaware PIC strategy on directly targeted firms’ tax planning.
The coefficients on Avg(Competitor DE PIC) and Avg(Competitor Post Law) measure the extent
to which firms’ competitors are capable of taking advantage of the Delaware PIC strategy and
competitors’ exposure to state measures to neutralize the strategy, respectively.
Avg(Competitor DE PIC × Competitor Post Law) is the main variable of interest in Eq.
(3), and its coefficient measures whether firms’ tax planning has a strategic component that is a
direct response to their industry competitors’ tax planning. A positive coefficient implies that firms
with industry competitors that are likely taking advantage of the Delaware PIC strategy also
decreased their own tax planning following the enactment of state policies designed to neutralize
the strategy, despite not being directly affected by these policies. Because these firms witnessed a
decrease in their industry competitors’ expected tax planning, a positive relation would be
evidence of strategic complementarities in corporate tax planning, and a negative relation would
be evidence of strategic substitutions in corporate tax planning. No relation would indicate that
firms make their tax planning decisions in a non-strategic fashion, without regard to their industry
- 23 -

competitors’ expected tax planning, or that our tests lack sufficient power to reliably detect any
strategic reactions.
4. Variable Measurement and Sample Construction
4.1. Measurement of corporate tax planning
As noted by Slemrod (1993) and Hanlon and Heitzman (2010), there is no universally
accepted definition of what constitutes tax planning. Conventional use of the term is broad and
encompasses a range of activities that are both legal (e.g., corporate debt policy, transfer pricing
decisions, and permanently reinvested earnings) and illegal (e.g., tax evasion and fraudulent
reporting). Following most prior work, we adopt this relatively expansive notion of tax planning
and examine multiple alternative measures that are common in the economics, finance, and
accounting literatures (e.g., Chen et al., 2010; Armstrong et al., 2012; Lisowsky et al., 2013; Hasan
et al., 2014; Dyreng et al., 2016; Cen et al., 2017). Collectively, these measures should capture a
broad range of different activities that are symptomatic of tax planning.
We use several alternative measures of corporate effective tax rates (ETRs) to measure Tax
Planning. First, we use Cash ETR, which is total taxes paid in cash during the year divided by
pretax income. Second, we use GAAP ETR, which is total income tax expense divided by pretax
income (Dyreng, et al., 2008). For tests in the Delaware research setting that examine variation in
tax planning at the state level, we use State ETR, which is total state tax expense divided by pre-
tax income (Dyreng et al., 2013). Finally, in subsequent tests, we repeat our analyses using firms’
three- and five-year Cash ETRs, GAAP ETRs, and State ETRs to capture tax planning activities
that might manifest over longer horizons (Dyreng et al., 2008).
4.2. Sample construction
- 24 -

Our sample selection procedure begins with all listed firms in Compustat for fiscal years
1993 through 2013 for which we have the necessary data to compute each of our primary tax
planning measures and control variables. Following Dyreng et al. (2016) and others, we exclude
firm-years with negative pretax income and, where necessary, we truncate Cash ETR, GAAP ETR,
and State ETR so that they lie in the unit interval (i.e., between zero and one). 17 We require non-
missing control and dependent variables for all of our tests, and we lag all firm- and industry-level
control variables one year. In the Irish research setting, we restrict the sample to include only
wholly-domestic U.S. firms (i.e., those without foreign assets or income). Following prior work
on strategic reactions and peer effects in corporate behavior, we further restrict the sample to
include only firms with at least 10 listed firms in their three-digit SIC industry and that are listed
in the CRSP database during the year (e.g., Leary and Roberts, 2014). Finally, we winsorize all
firm- and industry-level continuous variables at the 1st and 99th percentiles. The final sample for
our Irish research setting consists of 21,490 firm-year observations and spans the period 1993 to
2013 and includes 138 unique industries measured using three-digit historical SIC codes. The final
sample for our Delaware research setting consists of 8,618 firm-year observations. 18
Panels A and B of Table 1 present descriptive statistics for variables used in our Irish and
Delaware research settings, respectively. The distributions of the firm-, industry-, and state-level
variables for our sample are similar to those in prior studies of corporate tax planning (e.g.,
Armstrong et al., 2012; Dyreng et al., 2013; Dyreng et al., 2016). For example, the average GAAP
ETR for our Irish sample is 28%, and the average Cash ETR is 24%. There are some differences
between the averages in Panel A1 and the industry averages in Panel A2 (e.g., average industry
17
We truncate 1,313 observations to equal zero and 575 observations to equal one in our final sample that is reported
in Panel A of Table 1.
18
We require firms to have non-missing pre-tax domestic income and state income tax expense in the Delaware-haven
sample, which significantly reduces the sample size relative to that in the Irish-haven analysis.
- 25 -

ROA is 8% whereas average firm-level ROA is 6%). These differences arise from our use of market
value-weighted industry averages, while the averages in Panel A are implicitly equally weighted.
5. Results
We test for evidence of strategic reactions in two distinct research settings. We first
examine the Irish-haven setting and second we examine the Delaware-haven setting.
5.1. Irish-haven difference-in-differences analysis
5.1.1. Irish-haven strategic reactions
Table 2 presents results from estimating Eq. (2), which models tax planning in a partially-
overlapping groups difference-in-differences analysis around the enactment of significant cuts in
Irish corporate tax rates. Panel A presents results for Cash ETR. The coefficient on Post Rate Cut
× Treated Irish Exposure in column (1) implies that wholly-domestic firms with Irish-haven
industry competitors responded to their competitors’ increased tax planning by reducing their own
Cash ETR by 3.2 percentage points after the enactment of the Irish tax cuts (t-stat of –2.26). This
reduction is as compared to the concurrent change in the Cash ETR of wholly-domestic firms with
no Irish-haven industry competitors—but that are otherwise similar—and therefore represents the
strategic component of tax planning. The magnitude of this strategic response is economically
significant, as it represents 14.5% of the sample standard deviation of Cash ETR. Furthermore,
this result is robust to the inclusion of two-digit SIC code industry-year, firm, and industry-year
and firm fixed effects in columns (2), (3), and (4), respectively.
We find similar results for GAAP ETR in Panel B of Table 2. The coefficient on Post Rate
Cut × Treated Irish Exposure in column (1) implies that wholly-domestic firms with Irish-haven
industry competitors had a relative reduction in their GAAP ETRs of 2.9 percentage points
- 26 -

following the Irish tax cuts (t-stat of –2.19). This relative decrease is economically significant, as
it represents 15.3% of the sample standard deviation of GAAP ETR. We draw similar inferences
when we include two-digit SIC code industry-year, firm, and both industry-year and firm fixed
effects in columns (2), (3), and (4), respectively. Multiplying the coefficients when Cash ETR
(GAAP ETR) is the dependent variable by the sample average pre-tax income implies that wholly-
domestic firms with Irish-haven competitors reduced their tax expense by $6.5 million ($5.9
million) relative to their wholly-domestic counterparts with no Irish-haven competitors following
the Irish tax cuts.19,20
To estimate the direct effect of the Irish tax cuts on Irish-haven firms we estimate Eq. (2)
to compare the sample of Irish-haven firms (i.e., those with Irish operations) with a control sample
of domestic-only firms with no Irish-haven industry competitors. We include Post 1997, an
indicator for years after 1997, to capture the direct effect of the reduction in Irish corporate tax
rates on Irish-haven firms’ ETRs. Panels A and B of Table 3 present results using Cash ETR and
GAAP ETR to measure Tax Planning, respectively. In each panel, we find that firms with Irish
operations experienced significant reductions in their effective tax rates following the reduction in
Irish corporate tax rates. For example, in column (4) of Panels A and B, which rely on within-firm
variation in changes in effective tax rates, we find that firms with Irish operations experienced a
19
Based on our sample average pre-tax income of $202 million.
20
A prior version of this paper used peers’ idiosyncratic returns as an instrument for peer tax planning (e.g., Leary
and Roberts, 2014). Following Leary and Roberts (2014), we calculated idiosyncratic returns from an industry-return
adjusted market model (where industry is based on three-digit SIC code) estimated for each firm on a rolling annual
basis using historical monthly CRSP stock returns during the prior five years. We required a minimum of twelve
months of prior stock return data when estimating each regression. We draw similar inferences using this alternative
identification strategy (first-stage coefficient of 0.067 (0.140) and associated t-stat of 6.40 (10.57) and second-stage
coefficient on peer tax planning of 0.143 (0.036) and associated t-stat of 3.82 (2.13) when using Cash ETR (GAAP
ETR) to measure tax planning. The data requirements for this test reduce our sample by 6,433 observations (23%).
Relaxing these data requirements does not qualitatively affect our main inferences (coefficient estimate of –0.021 and
corresponding t-stat of –2.03 for the results in Column (1) of Table 2 Panel A and coefficient estimate of –0.023 and
corresponding t-stat of –2.45 for the results in Column (1) of Table 2 Panel B after relaxing the data requirements).
- 27 -

5.2 and 6.9 percentage point reduction in their Cash ETR and GAAP ETR, respectively (t-stats of
–1.81 and –3.53).
Comparing the results in Tables 2 and 3 suggests that the magnitude of strategic reactions
is large. For example, the results in Table 2, Panel B column (1) indicate that the indirect effect of
the Irish tax cuts is a 2.9 percentage point reduction in GAAP ETRs. The corresponding results in
Table 3, Panel B, column (1) indicate that the direct effect of the Irish tax cuts is a 4.3 percentage
point reduction in GAAP ETRs. Together, these estimates imply that a one percentage point
increase in competitors’ tax planning results in an approximately 0.63 percentage point increase
in firms’ tax planning (2.9/4.3).
We also take three steps to ensure that the maintained parallel trends assumption inherent
in the difference-in-differences design is satisfied in the Irish-haven setting. First, we assess
covariate balance between treatment and control groups in Table 1, Panel A3. Of the eight controls
we examine, only Book-to-Market is statistically different between the treatment and control firms
at the 10% level. 21 Second, we plot the average Cash ETR and GAAP ETR over time for the treated
and control firms in Figure 2. For both measures we find that treated and control firms exhibit
parallel trends prior to the Irish tax cut, and that treated firms' ETRs decrease relative to control
firms' ETRs after 1998.
Third, in addition to the non-parametric evidence in Figure 2, we present regression
evidence that treatment and control firms shared parallel trends in Figure 3. We estimate Eq. (2),
including all controls and fixed effects, after replacing the Post indicator with separate indicators
for each year relative to the treatment year. We then plot the coefficient estimates and 95%
confidence intervals for the interaction between Treatment and each indicator when using Cash
21
Under the null of random assignment, about one out of every ten variables would be expected to statistically differ
between the treatment and control groups by chance.
- 28 -

ETR (Panel A) and GAAP ETR (Panel B) as the dependent variable. We find no evidence of
differential trends across the treatment and control groups in the period before the Irish rate cut.
This finding is consistent with the evidence in both Figure 2 and Table 1, Panel A3 and suggests
that the parallel trends assumption is valid in this setting.
5.1.2. Irish-haven economic mechanism analysis
In this section, we consider several non-mutually exclusive potential mechanisms through
which strategic complementarities in corporate tax planning might arise. We first examine whether
these strategic complementarities are the result of “leader-follower” dynamics within industries.
Several recent studies suggest that firms might mimic or emulate the actions of the perceived
“leaders” in their industry (e.g., Leary and Roberts, 2014; Xiao, 2017).
To identify leaders and followers, we follow prior work and assume that larger firms are
more likely to be industry leaders (e.g., Leary and Roberts, 2014; Xiao, 2017). Larger firms
arguably have more resources and stronger incentives to gather private information about the
optimal level of tax planning. 22 Smaller firms might monitor their larger industry competitors to
infer their private information from their tax planning decisions. Evidence that smaller firms’ tax
planning is more responsive to the tax planning of their larger industry competitors would be
consistent with leader-follower dynamics generating strategic complementarities in corporate tax
planning. Therefore, in our first mechanism test we examine whether there is a differential
responsiveness of smaller and larger firms to their industry competitors’ tax planning.
Firms may also rationally herd together with respect to their tax planning in order to avoid
unwanted public or regulatory scrutiny (i.e., enforcement herding). For example, a firm whose tax
22
For example, large firms may invest relatively more in tax planning or work more closely with tax authorities to
determine the maximum “acceptable” amount of tax planning (Ayers, Siedman, and Towry, 2015). Furthermore,
larger firms are more likely to have the legal resources and wherewithal to challenge unfavorable tax enforcement
outcomes, suggesting that larger firms are also more likely to establish a precedent that other firms can follow.
- 29 -

planning is noticeably more aggressive than the “typical” level of tax planning in its industry may
face a greater likelihood of an audit by tax authorities or invite tax policies aimed at curbing tax
planning.23 Consequently, firms may be less willing to take an aggressive tax position if they
expect their competitors to curb their tax planning. Conversely, firms may be more inclined to
adopt aggressive tax positions if they expect their competitors to engage in more aggressive tax
planning. Indeed, competitive pressure may force them to do so.24 We consider rational herding in
corporate tax planning as another mechanism that could generate strategic complementarities in
corporate tax planning.
Finally, given the complex, dynamic, and interconnected nature of tax laws, regulations,
treaties, and judicial rulings, firms may learn tax planning strategies from observing their
competitors’ tax planning (Hanlon and Heitzman, 2010; Brown, 2011; Brown and Drake, 2013).
For example, firms may observe their competitors reduce their tax burden via corporate inversions
to low-tax jurisdictions. These firms may then monitor the success of these tax planning strategies,
as well as learn how to take advantage of these strategies themselves, by studying their
competitors. Anecdotal evidence also suggests that tax authorities are concerned about firms’
ability to benchmark and reverse engineer the tax planning strategies of their competitors,
prompting some tax authorities to advocate “tax privacy” (Blank, 2014). We refer to this potential
mechanism as learning.
23
The notion of rational herding has been extensively studied in the finance, economics, and management literatures
(e.g., Nofsinger and Sias, 1999; Hirshleifer and Teoh, 2008). Rational herding refers to the phenomenon in which
individual agents simultaneously converge to similar choices by examining the same information, such as market
prices, or exposure to the same institutional environments and regulatory pressures. A rational herding equilibrium
can result from firms inferring information from the actions of other agents or as the result of their payoffs increasing
in the number of firms that take the same action. Our notion of rational herding corresponds to the latter type of
equilibrium, as the reputational or enforcement costs of tax planning are arguably decreasing in industry-competitors’
tax planning.
24
For example, firms might have tax planning opportunities at the margin that they are reluctant to pursue if they are
already more aggressive than their industry competitors, but will do so if ever their competitors become more tax
aggressive.
- 30 -

To test for evidence of learning and enforcement herding in corporate tax planning, we
examine the strategic responses of firms that have either higher or lower levels of tax planning
than their industry competitors. Firms with relatively low effective tax rates in a given industry are
more likely to be engaging in tax planning. Therefore, evidence that firms with higher effective
tax rates respond to their industry competitors by lowering their effective tax rates via increased
tax planning would suggest that learning is an important mechanism. Similarly, firms that are more
aggressive than their competitors are likely to be more sensitive to changes in enforcement and
public scrutiny. Therefore, finding that firms with lower effective tax rates respond to their
industry competitors by changing their tax planning would be evidence that enforcement herding
is an important mechanism.
Although we conduct these tests for learning and enforcement simultaneously, we note that
these two explanations are not mutually exclusive. Moreover, these tests are not designed to assess
whether strategic effects are larger or smaller for one group of firms, but rather to determine
whether there is a detectable effect for a given group. It is therefore possible to find evidence
consistent with both learning and enforcement herding in the same test. In contrast, the tests of the
leader-follower mechanism do imply a differential effect because they suggest that strategic effects
will be concentrated among smaller firms.
To operationalize our mechanism tests, we modify Eq. (2) by splitting the sample based on
firm size and firms’ relative level of tax planning. Panel A of Table 4 presents results from re-
estimating Eq. (2) for the separate subsamples when using Cash ETR as the measure of Tax
Planning. In columns (1) and (2) we split our main sample based on firm size. Large Firm is
defined as an indicator equal to one if a firm’s size is greater than the industry average, and zero
- 31 -

otherwise. 25 Column (1) presents results for large firms (Large Firm = 1) while column (2) presents
results for small firms (Large Firm = 0). The results suggest that small firms are not more sensitive
to the planning of their industry competitors and are therefore inconsistent with leader-follower
dynamics producing strategic complementarities in corporate tax planning. If anything, the
difference between the coefficients in columns (1) and (2) suggests that larger firms are more
sensitive to changes in the tax planning of their industry competitors (untabulated F-statistic of
9.06, p-value of <0.01).
Columns (3) and (4) of Panel A present the results from estimating Eq. (2) after splitting
the sample based on whether the firm exhibited less (Above Industry ETR = 1 in column (3)) or
more (Above Industry ETR = 0 in column (4)) tax planning than its competitors. We do find some
evidence of learning: the results suggest that less aggressive firms are sensitive to increases in their
industry competitors’ tax planning (coefficient estimate of –0.023; t-stat of –1.75 in column (3)).
We also find evidence that suggests that enforcement herding induces strategic complementarities
in firms’ tax planning. In particular, firms that are more aggressive than their industry
competitors—and are therefore arguably more concerned about tax enforcement—are sensitive to
changes in their competitors’ tax planning (coefficient estimate of –0.025; t-stat of –2.16 in column
(4)).
Panel B of Table 4 presents results using GAAP ETR as the measure of Tax Planning. We
find no evidence of leader-follower dynamics inducing strategic complementarities in corporate
tax planning (untabulated F-statistic of 1.44, p-value of 0.15). In contrast to the results in Panel A,
the results in Panel B provide no evidence that learning induces strategic complementarities in
corporate tax planning. In particular, the estimates in column (3) provide no evidence that firms
25
We use mean rather than median firm size—which produces an unequal sample split with fewer firms above the
sample mean—because it is unlikely that half the sample firms are “leaders.”
- 32 -

with relatively high GAAP ETRs are sensitive to increases in their industry-competitors’ tax
planning. However, we again find evidence that enforcement herding produces strategic
complementarities in corporate tax planning. The results in column (4) indicate that tax aggressive
firms respond in a similar fashion to a reduction in their competitors’ tax planning (coefficient
estimate of –0.035; t-stat of –2.13).
5.1.3. Irish-haven placebo analysis
Strategic reactions have a close analogue in the individual peer effects literature, which
examines whether individual behaviors (e.g., smoking, drug use, and crime) propagate through
social interactions.26 Cohen-Cole and Fletcher (2008) demonstrate an important concern with
studies in this literature by using the standard research design to document evidence of “network
diffusion” in non-social outcomes that should not exhibit such behavior, including height, acne,
and headaches. 27 Cohen-Cole and Fletcher’s (2008) approach suggests an analogous
“falsification” test in our research setting. Specifically, if strategic reactions in tax planning are an
artefact of inadequately accounting for the endogenous relationship between firms and their
industry competitors, we should also find evidence of spurious strategic reactions in outcomes that
seem implausible.
We use firms’ pre-tax performance as an outcome that should not exhibit strategic
reactions, since it seems unlikely that changes in their industry competitors’ tax planning should
26
The key difference between strategic reactions among industry competitors and social interactions in social networks
is that social interactions diffuse behavior via behavioral mechanisms or through tradeoffs between nonmonetary costs
and benefits (e.g., a teenager who trades off the social costs of not smoking when with a group of friends who smoke).
In contrast, strategic reactions are rational, non-behavioral responses to competitors’ expected decisions, which are
the result of a monetary cost-benefit tradeoff.
27
Cohen-Cole and Fletcher’s (2008) primary criticism of the literature on peer effects is that prior studies fail to
sufficiently account for endogeneity. As we discussed earlier, we address endogeneity concerns through our use of
two distinct research settings that feature different arguably exogenous shocks to competitors’ tax planning.
- 33 -

produce changes in firms’ pre-tax performance.28 We re-estimate Eq. (2) using firms’ Pretax Cash
Flow, measured as pre-tax cash flow from operations scaled by beginning of year total assets, as
the dependent variable. We examine cash flows rather than earnings because there may be strategic
complementarities or peer effects in earnings management via accruals.
The results in Table 5 provide no evidence of strategic reactions in firms’ pre-tax
performance. In particular, the results in column (1) suggest that the enactment of significant Irish
tax cuts had no detectable effect on the relative pre-tax income of firms exposed to Irish-haven
competitors (t-stat of –1.51 for the coefficient on Post Rate Cut × Treated Irish Exposure).
5.1.4. Irish-haven Hoberg and Phillips industry classification
A potential concern with our partially-overlapping groups research design is that it relies
on an a priori classification (or grouping) to define firms’ competitors (i.e., three-digit SIC codes).
To ensure that our results are robust to alternative classifications of a firm’s competitors, we re-
estimate each of our primary analyses using Hoberg and Phillips (2010, 2016) text-based industry
classifications to identify competitors.29 We report the results in Table 6 and find that all of our
primary inferences continue to hold. We also find that the economic magnitudes of the main
coefficients of interest are similar to those of their counterparts in our earlier analyses that use
three-digit SIC codes.
5.1.5. Irish-haven long-run tax planning
28
Alternatively, since an increase in competitors’ tax planning leads to an increase in their after-tax profitability, it
could allow competitors to compete more aggressively. In this case, increases in competitors’ tax planning may lead
to a decline in a firm’s own pre-tax profitability. This, in turn, could cause firms to alter their own tax planning to
“keep up” with their competitors’ after-tax performance. We view this scenario as an alternative mechanism that could
cause strategic complementarities in corporate tax planning. Therefore, this falsification test also speaks to the
existence of this alternative mechanism. Evidence that an increase in competitors’ tax planning causes a decrease in
firms’ pre-tax performance would be consistent with this alternative mechanism.
29
Available on Gerard Hoberg and Gordon Phillip’s website: http://hobergphillips.usc.edu/industryclass.htm. We
thank the authors for making these data publicly available.
- 34 -

A potential concern with one-year ETRs as a measure of corporate tax planning is that they
might exhibit volatility from one year to the next for reasons unrelated to tax planning activities
(Hanlon and Heitzman, 2010). Dyreng et al. (2008) address this concern by calculating ETRs over
a longer horizon, which mitigates potential measurement error due to mismatches between cash
taxes paid and earnings from the current period.30 We therefore assess the sensitivity of our
inferences to using long-run ETRs as alternative measures of corporate tax planning.
We calculate 3-year and 5-year ETRs as the sum of GAAP income tax expense and cash
taxes paid, scaled by the sum of pre-tax income during the same period (i.e., 3-Year Cash ETR, 5-
Year Cash ETR, 3-Year GAAP ETR, and 5-Year GAAP ETR, respectively). 31 Table 7 presents
results using the alternative long-run ETRs as the dependent variable in our Irish setting. We find
evidence of strategic complementarities in long-run corporate tax planning (t-stats ranging from –
2.42 to –3.52 on Post Rate Cut × Treated Irish Exposure). These results suggest that the strategic
complementarities in corporate tax planning that we document in our initial tests are also present
in long-run measures of tax planning. Moreover, they also suggest that our previous findings for
one-year ETRs are not an artefact of mismatches between cash taxes paid and pre-tax income.
5.2. Delaware-haven differences-in-differences analysis
5.2.1. Delaware-haven strategic reactions
Table 8 presents results from estimating Eq. (3), which models tax planning in a partially-
overlapping groups differences-in-differences analysis using states’ staggered adoption of policies
designed to curb tax planning via inter-state income shifting as shocks to competitors’ tax
30
These mismatches can arise from timing differences in tax payments, cash settlements with tax authorities for
violations recognized in prior periods, and any potential U.S. taxes on foreign earnings that are unpaid until
repatriation, but are included in current earnings (Hanlon and Heitzman, 2010).
31
Note that data requirements on firms’ future tax expense, tax payments, and pretax income restricts our sample,
resulting in fewer observations in Table 7 relative to each tests’ counterpart in earlier tables.
- 35 -

planning. The coefficient on Avg(Competitor DE PIC × Competitor Post Law) measures the
indirect effect of these state policies on the tax planning of firms that are not directly exposed to
these policies, but that are indirectly exposed by way of shared industry membership with directly
exposed firms. The coefficient estimate in column (1) implies that a one standard deviation
increase in competitors’ exposure to state policies that neutralize the Delaware PIC strategy results
in a 0.14 percentage point increase firms’ State ETR (t-stat of 2.20). This increase is economically
significant as it represents 2.8% of the sample standard deviation of State ETR.
We also re-estimate Eq. (3) using alternative fixed effects structures to control for other
potential forms of unobserved heterogeneity. In particular, in columns (2) through (6) of Table 8
we sequentially include (i) region-year, (ii) state, (iii) state-year, (iii) industry-year, and (iv) firm,
state-year, and industry-year fixed effects and find that our inferences remain qualitatively similar,
albeit not statistically significant in columns (5) and (6).32 For parsimony we report estimates of
all subsequent variants of Eq. (3) with year fixed effects, but note that we obtain qualitatively
similar inferences when using these alternative fixed effect structures.
Again, the results suggest that the magnitude of strategic reactions is large. The results in
Table 8, column (1) imply that if all of a firm’s competitors went from unexposed to exposed to
state laws designed to curb the Delaware PIC strategy, the result would be a 0.4 percentage point
increase in the firm’s State ETR. The coefficient on Avg(Own DE PIC × Post Law) suggests that
if a firm went from unexposed to exposed to state laws design to curb the Delaware PIC strategy,
32
In untabulated analyses we find respective t-stats of 3.00 and 6.26 for the coefficients on Avg(Competitor DE PIC
× Competitor Post Law) in the specifications corresponding to those reported in columns (5) and (6) if we instead
scale total state tax expense by pre-tax total income (the t-stats corresponding to the specification reported in columns
(1) – (4) range from 2.90 to 4.13). We scale by pre-tax domestic income to facilitate comparison of our estimates with
those reported by Dyreng et al. (2013).
- 36 -

the result would be a 1.5 percentage point increase in the firm’s State ETR.33 Together, these
estimates imply that a one percentage point decrease in competitors’ tax planning results in an
approximately 0.27 percentage point decrease in firms’ tax planning (0.4/1.5).
The magnitude of strategic reactions documented in our Irish-haven tests (an elasticity of
roughly 0.63) are larger than those documented in our Delaware-haven tests (an elasticity of
roughly 0.27). In other words, firms appear to respond more to increases in their competitors’ tax
planning. One potential explanation for the differential magnitude is that firms are more willing to
reduce their tax burden and are therefore more responsive to increases in their industry-
competitors’ tax planning. However, we interpret these differential magnitudes with caution since
our estimates of strategic reactions are not structural in the sense that they depend on economic,
policy, and other conditions.
For example, federal tax regulators may be less constrained than state tax regulators,
causing enforcement herding incentives to be weaker in the federal setting. Similarly,
measurement error may differ across the two settings (e.g., if our state subsidiary data is noisy,
this may attenuate the coefficient estimates in the Delaware-haven setting). Therefore, we
cautiously interpret the above evidence of differential magnitudes as consistent with firms
exhibiting stronger strategic reactions to increases in their competitors’ tax planning. However, we
believe there is opportunity for future research to compare strategic reactions in a setting where
economic and policy conditions and measurement error are similar for both increases and
decreases in firms’ competitors’ tax planning.
5.2.2. Delaware-haven economic mechanism analysis
33
The evidence in Dyreng et al. (2013) indicates that the direct effect of the Delaware PIC strategy was a 0.9
percentage point decline in competitors’ State ETRs. The larger effect we document is consistent with changes in tax
avoidance policies causing spillovers on the tax behavior of firms that were not directly targeted by the policy, biasing
estimates of the effect downward if unaccounted for.
- 37 -

Table 9 presents the results of modifying Eq. (3) to accommodate the mechanism tests in
the Delaware PIC setting. Columns (1) and (2) present results from estimating Eq. (3) using the
subsample of large firms (Large Firm = 1) and small firms (Large Firm = 0), respectively. We
find some evidence of leader-follower dynamics inducing strategic complementarities in corporate
tax planning (untabulated F-statistic of 2.56, p-value of 0.12).
Columns (3) and (4) of Table 9 present the results from estimating Eq. (3) after splitting
the Delaware-haven sample based on whether the firm exhibits relatively less (Above Industry ETR
= 1 in column (3)) or relatively more (Above Industry ETR = 0 in column (4)) tax planning than
its industry competitors. We find evidence that firms that are less aggressive than their industry
competitors—and therefore should have greater scope to learn and implement new tax planning
strategies—are sensitive to increases in their competitors’ tax planning (coefficient estimate of
0.014; t-stat of 2.31 in column (3)).
We find no evidence that firms that are more aggressive than their industry competitors—
and therefore should be more concerned about tax enforcement—are sensitive to changes in their
industry competitors’ tax planning (coefficient estimate of 0.001; t-stat of 1.11 in column (4)). A
potential explanation for finding stronger evidence of enforcement herding in the Irish-haven
setting than in the Delaware-haven setting is that the IRS is the regulator in the former, while
various state enforcement agencies are the regulator in the latter. Because the IRS has broader
scope and more resources, it is a more salient enforcement authority than are its state-level
counterparts.
Collectively, the results in Tables 4 and 9 provide no consistent evidence that smaller firms
are more sensitive to changes in their industry competitors’ tax planning than are their larger
counterparts. This finding is inconsistent with leader-follower dynamics partially causing strategic
- 38 -

complementarities in corporate tax planning. We find some evidence that firms that are engaged
in less tax planning than their industry competitors are responsive to changes in their competitors’
tax planning. This finding suggests that learning may be partially responsible for the strategic
complementarities in corporate tax planning. Finally, we find more consistent evidence that firms
that engage in more tax planning than their competitors are responsive to changes in their
competitors’ tax planning, consistent with enforcement herding causing strategic
complementarities in corporate tax planning.
5.2.3. Delaware-haven placebo analysis
Finally, Table 10 presents results from re-estimating Eq. (3) using Pretax Cash Flow as the
dependent variable as a falsification test. The results again provide no evidence of strategic
reactions in firms’ pre-tax performance (t-stat of 1.35 for the coefficient on Avg(Competitor DE
PIC × Competitor Post Law)). Collectively, the results in Table 10 provide no evidence of strategic
complementarities in firms’ pre-tax performance, suggesting that our finding of strategic
complementarities in corporate tax planning is not an artefact of a spurious endogenous
relation.34,35
34
In untabulated analyses, we find no evidence of strategic reactions in the Delaware-haven setting when using our
alternative industry classification. One possible explanation for why our results are somewhat weaker when using this
alternative classification of industry is that it does not closely correspond to how tax authorities (e.g., the IRS) classify
firms for purposes of identifying tax avoidance. In contrast, our primary industry classification using SIC codes
corresponds to how the IRS classifies industry peers. Accordingly, these results also provide evidence that rational
herding by firms to avoid scrutiny from tax authorities is a mechanism responsible for inducing strategic
complementarities in firms’ tax planning. To the extent that the Hoberg and Phillips industry definitions more closely
correspond to how stakeholders implicitly or explicitly classify firms as peers, these results suggest that enforcement
herding is less likely to be driven by reputational concerns with stakeholders.
35
In untabulated analyses, we continue to find evidence of strategic complementarities in the Delaware-haven setting
when using 3-year and 5-year State ETRs as the dependent variable (t-stats of 3.13 and 1.94, respectively, for the
coefficient on Competitor DE PIC × Competitor Post Law).
- 39 -

6. Conclusion
Using a partially-overlapping groups difference-in-differences identification strategy in
two different research settings, we show that competitors’ tax planning is an important determinant
of a firm’s own tax planning. We explore several possible reasons why firms exhibit strategic
reactions to their industry competitors’ tax planning, including leader-follower dynamics among
firms, rational herding, and learning. We find evidence that firms strategically respond to their
competitors’ tax planning by herding in order to avoid “standing out” among their industry
competitors. We also find some evidence that firms respond to their industry competitors’ tax
planning because they learn from their industry competitors’ tax planning.
We contribute to the literature on the determinants of corporate tax planning by
documenting evidence of strategic complementarities in the tax planning of industry competitors.
This finding has potential policy implications, as it suggests that policies that seek to limit or curtail
the tax planning of a targeted subset of firms could inadvertently affect the tax planning of their
otherwise unaffected (i.e., untargeted) competitors through their strategic reactions. This finding
also has implications for researchers, as it suggests that research designs and theoretical models
that do not account for strategic reactions in corporate tax planning may be incomplete and may
fail to capture the full effect of firms’ tax planning or regulators’ enforcement efforts. We also
contribute to the emerging literature on “peer” and “network” effects by demonstrating that firms
strategically respond to their peers’ tax planning.
- 40 -

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Appendix A. Variable definitions
This table presents definitions of the variables in our empirical tests. We also compute industry-level averages for
each of these variables as the market value-weighted average of all firms within a three-digit SIC code industry-year
combination, excluding the ith observation.
Tax Planning Measures
Cash ETR Total taxes paid during the current year scaled by pre-tax income
GAAP ETR Total tax expense during the current year scaled by pre-tax income
State ETR Total state tax expense during the current year scaled by pre-tax domestic
income
3-Year Cash ETR Sum of total taxes paid during the current year and each of the following
two years, scaled by the sum of total pre-tax income during the current
year and each of the following two years
3-Year GAAP ETR Sum of tax expense during the current year and each of the following two
years, scaled by the sum of total pre-tax income during the current year
and each of the following two years
5-Year Cash ETR Sum of total taxes paid during the current year and each of the following
four years, scaled by the sum of total pre-tax income during the current
year and each of the following four years
5-Year GAAP ETR Sum of tax expense during the current year and each of the following four
years, scaled by the sum of total pre-tax income during the current year
and each of the following four years
Control Variables
Book Leverage Book value of total debt scaled by book value of total assets, measured at
the end of the fiscal year
Market Leverage Book value of total debt scaled by market value of total assets, measured
at the end of the fiscal year. Market value of total assets is measured as
the Compustat stock price as of fiscal year end multiplied by common
shares outstanding, plus debt in current liabilities, plus total long-term
debt, plus preferred stock liquidating value, minus deferred taxes and
investment credits
ROA Income before extraordinary items scaled by beginning of the year total
assets
Foreign Assets Indicator that equals one if a firm has foreign assets and zero otherwise
New Investment Sum of R&D, capital expenditures, and acquisition, minus sale of
property and depreciation, all scaled by average total assets. Average total
assets is defined as beginning of year total assets plus end of year total
assets, divided by two
Log(Market Value of Equity) Natural logarithm of Compustat stock price multiplied by common shares
outstanding as of the end of the fiscal year
Book-to-Market Book value of assets scaled by market value of assets, measured as the
Compustat stock price as of fiscal year end multiplied by common shares
outstanding, plus debt in current liabilities, plus total long-term debt, plus
preferred stock liquidating value, minus deferred taxes and investment
credits
Change in Goodwill Goodwill at the end of the fiscal year minus Goodwill at the beginning of
the fiscal year, scaled by total assets as of the end of the fiscal year
Net Operating Loss Indicator that equals one if the firm has had a tax loss carryforward during
any of the previous three years and zero otherwise
- 45 -

Appendix A. Variable definitions (cont’d)
State Controls
GSP Growth The percentage change from the prior year’s state GDP, weighted by non-
Delaware subsidiaries
Corporate State Tax Rate The top statutory tax rate on corporate income, weighted by non-
Personal State Tax Rate The top statutory rate on personal income, weighted by non-Delaware
subsidiaries
Economic Mechanism Partitioning Variables

Large Firm Indicator that equals one if a firm’s size is greater than its market value-
weighted industry (based on three-digit SIC code) average market value
of equity and zero otherwise
Above Industry ETR Indicator equal to one if a firm’s own effective tax rate is higher than its
competitor industry average (based on three-digit SIC code) during the
year and zero otherwise
Irish-haven Partially-Overlapping Industry Membership Variables
Post Rate Cut Indicator equal to one after 1998 and zero otherwise
Treated Irish Exposure Indicator equal to one if a firm has industry-competitors with operations
in Ireland and zero otherwise
Delaware-haven Competitor Treatment Variables

Avg(Competitor Post Law) Indicator equal to one if the state requires combined reporting, follows the
economic nexus doctrine, or both, and zero otherwise, weighted by non-
Avg(Competitor DE PIC) Indicator equal to one if the subsidiary has an in-state industry competitor
in the top tercile of Delaware subsidiaries and above-median market-to-
book ratios and zero otherwise, weighted by non-Delaware subsidiaries
Avg(Competitor DE PIC × Post Law) Non-Delaware subsidiary weighted average of Competitor Post Law
multiplied by Competitor DE PIC
Delaware-haven Own Treatment Variables

Avg(Own DE PIC) Indicator equal to one if the firm’s own subsidiary is in the top tercile of
Delaware subsidiaries and above-median market-to-book ratios of our
sample and zero otherwise, weighted by non-Delaware subsidiaries
Avg(Own Post Law) Indicator equal to one if the state requires combined reporting, follows the
economic nexus doctrine, or both, and zero otherwise, weighted by non-
Avg(Own DE PIC × Post Law) Non-Delaware subsidiary weighted average of Own Post Law multiplied
by Own DE PIC
Placebo Test Outcome
Pretax Cash Flow Pre-tax cash flows from operations during the fiscal year, scaled by
beginning of the year total assets
- 46 -

Figure 1. Partially Overlapping Groups Research Design
This figure illustrates the sample construction for our partially-overlapping groups research design used in our Irish-
haven difference-in-differences analysis, consisting of three groups: (i) Irish-haven industry firms with an Irish
subsidiary (withheld from our sample), (ii) domestic firms in an industry with Irish-haven competitor (treatment
group), and (iii) domestic firms without an Irish-haven competitor (control group).
- 47 -

Figure 2. Irish-haven Parallel Trends (Non-Parametric Pattern)
This figure presents average effective tax rates for wholly-domestic U.S. firms that have competitors with Irish-haven
operations (Treatment Group) and wholly-domestic U.S. firms that do not have competitors with Irish-haven
operations (Control Group). Panel A plots average cash effective tax rates (Average Cash ETR) and Panel B plots
average GAAP effective tax rates (Average GAAP ETR). Ireland began a progressive reduction of its corporate tax
rate in 1998.
Panel A. Cash ETR
0.28
0.27
0.26
Average Cash ETR
0.25
0.24
0.23
0.22
0.21
0.2
0.19
1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
Contol Group Treatment Group
Panel B. GAAP ETR
0.32
0.31
Average GAAP ETR
0.3
0.29
0.28
0.27
0.26
0.25
1994 1995 1996 1997 1998 1999 2000 2001 2002
Year
Contol Group Treatment Group
- 48 -

Figure 3. Irish-haven Parallel Trends (Treatment Effect Timing)
This figure presents OLS regression coefficient estimates and two-tailed 95% confidence intervals based on standard
errors clustered by industry after re-estimating Eq. (2), including all controls and fixed effects, and replacing the Post
indicator with separate indicators for each year relative to the treatment year of 1998. Panel A presents results for
Cash ETR and Panel B presents results for GAAP ETR.
Panel A. Cash ETR

0.08
0.06
0.04
0.02
0.00
Cash ETR
-0.02
-0.04
-0.06
-0.08
-0.10
-0.12
1995 1996 1997 1998 1999 2000+
Year
Panel B. GAAP ETR

0.04
0.02
0.00
-0.02
GAAP ETR
-0.04
-0.06
-0.08
-0.10
-0.12
-0.14
1995 1996 1997 1998 1999 2000+
Year
- 49 -

Figure 4. Delaware Experiment Affected States
Panel A presents the geographic distribution of states requiring combined reporting of corporate income (Dyreng et
al., 2013). Seventeen U.S. states (grey) adopted combined reporting prior to 1995 and seven states (striped) adopted
combined reporting between 1995 and 2009. Panel B presents the geographic distribution of states that require
economic nexus of corporate income (Dyreng et al., 2013). Twenty-six U.S. states (grey) adopted the economic nexus
rule prior to 1995 and twelve states (striped) adopted the economic nexus rule between 1995 and 2008.
Panel A. Combined Reporting Adoption
Panel B. Economic Nexus Adoption
- 50 -

Table 1. Descriptive Statistics
This table presents descriptive statistics for variables used in our tests. Panels A1 and A2 report descriptive statistics for the firm-level and market value-weighted
peer-firm average (excluding firm i’s own value) variables, respectively, for the sample for the Irish-haven tests. Panel A3 reports differences in means for firm
level characteristics between treatment and control firms for our Irish-haven tests. Panels B1 and B2 report descriptive statistics for the firm-level and market value-
weighted peer-firm average (excluding firm i’s own value) variables, respectively, for the sample for the Delaware-haven tests.
Panel A1. Irish-haven Sample: Firm Characteristics

Tax Planning Measures N Mean SD P5 P10 P25 P50 P75 P90 P95
Cash ETR 21,490 0.21 0.22 0.00 0.00 0.00 0.17 0.34 0.46 0.59
GAAP ETR 21,490 0.27 0.19 0.00 0.00 0.05 0.34 0.39 0.42 0.47
3-Year Cash ETR 18,987 0.24 0.22 0.00 0.00 0.03 0.24 0.36 0.46 0.61
5-Year Cash ETR 14,916 0.25 0.22 0.00 0.00 0.03 0.26 0.36 0.47 0.65
3-Year GAAP ETR 19,250 0.28 0.20 0.00 0.00 0.10 0.34 0.39 0.42 0.50
5-Year GAAP ETR 15,502 0.28 0.20 0.00 0.00 0.09 0.34 0.39 0.43 0.55
Treatment Variables N Mean SD P5 P10 P25 P50 P75 P90 P95

Treated Irish Exposure 21,490 0.84
Post Rate Cut 21,490 0.61
Control Variables N Mean SD P5 P10 P25 P50 P75 P90 P95

Book Leverage 21,490 0.23 0.22 0.00 0.00 0.02 0.19 0.38 0.54 0.63
Market Leverage 21,490 0.23 0.23 0.00 0.00 0.01 0.16 0.38 0.57 0.69
ROA 21,490 0.06 0.12 –0.09 –0.02 0.02 0.06 0.11 0.18 0.24
New Investment 21,490 0.06 0.12 –0.05 –0.03 –0.01 0.03 0.10 0.20 0.29
Log(Market Value of Equity) 21,490 5.50 2.01 2.33 2.86 4.00 5.47 6.90 8.11 8.99
Book-to-Market 21,490 0.94 0.62 0.22 0.32 0.54 0.84 1.17 1.60 1.95
Change in Goodwill 21,490 0.01 0.05 0.00 0.00 0.00 0.00 0.00 0.03 0.09
Net Operating Loss 21,490 0.37
Placebo Test Outcomes N Mean SD P5 P10 P25 P50 P75 P90 P95
Pretax Cash Flow 19,851 0.06 0.20 –0.07 –0.02 0.01 0.04 0.09 0.16 0.22
- 51 -

Table 1. Descriptive Statistics (cont’d)
Panel A2. Irish-haven Sample: Industry Average Characteristics

Industry Average Control Variables N Mean SD P5 P10 P25 P50 P75 P90 P95
Industry Average Book Leverage 21,490 0.24 0.12 0.08 0.10 0.15 0.23 0.32 0.42 0.45
Industry Average Market Leverage 21,490 0.18 0.12 0.04 0.04 0.07 0.15 0.27 0.34 0.40
Industry Average ROA 21,490 0.08 0.04 0.02 0.04 0.05 0.08 0.11 0.14 0.16
Industry Average New Investment 21,490 0.07 0.06 –0.01 –0.01 0.02 0.06 0.11 0.14 0.16
Industry Average Log(Market Value of Equity) 21,490 8.47 1.07 6.48 7.02 7.71 8.63 9.30 9.78 9.93
Industry Average Book-to-Market 21,490 0.67 0.36 0.27 0.32 0.45 0.62 0.82 1.05 1.18
Industry Average Change in Goodwill 21,490 0.02 0.02 0.00 0.00 0.00 0.01 0.02 0.04 0.05
Industry Average Net Operating Loss 21,490 0.40 0.22 0.09 0.12 0.22 0.39 0.55 0.69 0.78
Panel A3. Irish-haven Sample Covariate Balance

Mean
Control Variables Treatment Control Diff.
Book Leverage 0.23 0.24 –0.01
Market Leverage 0.22 0.25 –0.03
ROA 0.06 0.07 –0.004
New Investment 0.06 0.05 0.01
Log(Market Value of Equity) 5.53 5.39 0.14
Book-to-Market 0.92 1.00 –0.08*
Change in Goodwill 0.01 0.02 –0.01
Net Operating Loss 0.38 0.36 0.02
- 52 -

Panel B1. Delaware-haven Sample: Firm Characteristics
Tax Planning Measures N Mean SD P5 P10 P25 P50 P75 P90 P95
State ETR 8,618 0.03 0.05 0.00 0.00 0.00 0.02 0.04 0.06 0.09
Treatment Variables N Mean SD P5 P10 P25 P50 P75 P90 P95

Avg(Competitor DE PIC × Post Law) 8,618 0.11 0.35 0.00 0.00 0.00 0.00 0.04 0.24 0.55
Avg(Competitor DE PIC) 8,618 0.03 0.06 0.00 0.00 0.00 0.00 0.03 0.08 0.14
Avg(Competitor Post Law) 8,618 0.09 0.14 0.00 0.00 0.00 0.03 0.13 0.27 0.38
Avg(Own DE PIC) 8,618 0.09 0.22 0.00 0.00 0.00 0.00 0.00 0.40 0.58
Avg(Own Post Law) 8,618 0.45 0.36 0.00 0.00 0.17 0.38 0.71 1.00 1.00
Avg(Own DE PIC × Post Law) 8,618 0.07 0.19 0.00 0.00 0.00 0.00 0.00 0.29 0.50
Firm Controls N Mean SD P5 P10 P25 P50 P75 P90 P95

Book Leverage 8,618 0.21 0.17 0.00 0.00 0.05 0.20 0.32 0.44 0.53
Market Leverage 8,618 0.20 0.20 0.00 0.00 0.03 0.15 0.31 0.49 0.63
ROA 8,618 0.05 0.09 –0.11 –0.04 0.01 0.05 0.09 0.14 0.18
New Investment 8,618 0.07 0.10 –0.03 –0.01 0.01 0.04 0.10 0.18 0.26
Foreign Assets 8,618 0.35 · · · · · · · ·
Book–to–Market 8,618 0.94 0.54 0.29 0.37 0.56 0.84 1.18 1.58 1.92
Change in Goodwill 8,618 0.02 0.06 0.00 0.00 0.00 0.00 0.02 0.07 0.13
Net Operating Loss 8,618 0.70
Log(Market Value of Equity) 8,618 7.21 1.91 3.89 4.75 5.97 7.17 8.47 9.69 10.40
State Controls N Mean SD P5 P10 P25 P50 P75 P90 P95

GSP Growth 8,618 0.04 0.03 0.01 0.01 0.02 0.04 0.06 0.09 0.09
State Corporate Tax Rate 8,618 0.01 0.02 0.00 0.00 0.00 0.01 0.02 0.04 0.05
State Personal Tax Rate 8,618 0.04 0.03 0.00 0.01 0.02 0.03 0.05 0.08 0.10
Placebo outcome N Mean SD P5 P10 P25 P50 P75 P90 P95

Pretax Domestic Income 8,616 0.10 0.10 –0.05 0.00 0.05 0.10 0.15 0.21 0.25
- 53 -

Panel B2. Delaware-haven Sample: Industry Average Characteristics
Industry Average Control Variables N Mean SD P5 P10 P25 P50 P75 P90 P95
Industry Average Book Leverage 8,618 0.19 0.13 0.00 0.01 0.10 0.17 0.26 0.37 0.45
Industry Average Market Leverage 8,618 0.14 0.14 0.00 0.00 0.05 0.10 0.20 0.33 0.44
Industry Average ROA 8,618 0.07 0.06 –0.01 0.00 0.03 0.07 0.10 0.14 0.16
Industry Average New Investment 8,618 0.06 0.06 –0.01 0.00 0.01 0.06 0.10 0.14 0.17
Industry Average Foreign Assets 8,618 0.32 0.33 0.00 0.00 0.01 0.22 0.52 0.91 1.00
Industry Average Book-to-Market 8,618 0.63 0.42 0.00 0.01 0.37 0.58 0.84 1.15 1.38
Industry Average Change in Goodwill 8,618 0.02 0.03 0.00 0.00 0.00 0.01 0.02 0.04 0.06
Industry Average Net Operating Loss 8,618 0.63 0.36 0.00 0.00 0.34 0.71 1.00 1.00 1.00
Industry Average Log(Market Value of Equity) 8,618 8.06 2.92 0.00 4.78 7.44 8.78 10.09 10.59 10.88
- 54 -

Table 2. Irish-haven Difference–in–Differences Analysis
This table reports OLS estimates of the following difference–in–differences specification for a sample of firms with
operations in the United States only:
𝑇𝑎𝑥 𝑃𝑙𝑎𝑛𝑛𝑖𝑛𝑔𝑖𝑗𝑡 = 𝛼 + 𝛽1 𝑇𝑟𝑒𝑎𝑡𝑒𝑑𝑖𝑗 + 𝛽2 𝑇𝑟𝑒𝑎𝑡𝑒𝑑𝑖𝑗 × 𝑃𝑜𝑠𝑡𝑡 + Γ𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 + 𝜀𝑖𝑗𝑡
Where Tax Planning is measured as either Cash ETR or GAAP ETR as defined in Appendix A and i, j, and t index
firms, industries, and years, respectively. Treated is an indicator equal to one if firm i has competitors—defined as
firms with the same three-digit SIC code—in industry j that have operations in Ireland and zero otherwise. Post is an
indicator equal to one after 1998, which corresponds to the beginning of the progressive reduction of corporate tax
rates in Ireland. Controls is a vector of time–varying firm and industry-average characteristics as defined in Panel A
of Table 1. For parsimony we do not tabulate coefficients for the control variables and fixed effects. All variables are
defined in Appendix A. t–statistics are reported below coefficient estimates and are calculated based on robust standard
errors clustered by industry. *, **, *** indicate statistical significance (two–sided) at the 0.1, 0.05, and 0.01 levels,
respectively.
Panel A. Cash ETR
Dependent variable: Cash ETRijt Cash ETRijt Cash ETRijt Cash ETRijt
(1) (2) (3) (4)
Treated Irish Exposureij –0.057* 0.007 · ·
(–1.96) (0.61) · ·
Post Rate Cutt ×Treated Irish Exposureij –0.032** –0.056*** –0.024*** –0.055**
(–2.26) (–3.88) (–3.63) (–2.35)
Firm Controlsijt–1 Yes Yes Yes Yes
Industry Average Controls–ijt–1 Yes Yes Yes Yes
Year Fixed Effects Yes No No No
Industry-Year Fixed Effects No Yes No Yes
Firm Fixed Effects No No Yes Yes
Observations 21,490 21,490 21,490 21,490
R2 0.106 0.215 0.496 0.531
Panel B. GAAP ETR

Dependent variable: GAAP ETRijt GAAP ETRijt GAAP ETRijt GAAP ETRijt
(1) (2) (3) (4)
Treated Irish Exposureij –0.065* 0.024*** · ·
(–1.82) (3.32) · ·
Post Rate Cutt ×Treated Irish Exposureij –0.029** –0.068*** –0.012** –0.042***
(–2.19) (–5.70) (–2.17) (–2.98)
Observations 21,490 21,490 21,490 21,490
R2 0.128 0.308 0.642 0.667
- 55 -

Table 3. Irish-haven Direct Effect
Irish-haven operations compared to a control sample of domestic-only firms with no Irish-haven industry
competitors around the passage of the Irish corporate tax rate cuts announced in 1997:
Where Tax Planning is measured as either Cash ETR or GAAP ETR as defined in Appendix A, and i, j, and t index
firms, industries, and years, respectively. Treated is an indicator equal to one if firm i has operations in Ireland as of
1997, and zero otherwise. Post is an indicator equal to one during years 1998 onward, which corresponds to the
beginning of the progressive reduction of corporate tax rates in Ireland. Controls is a vector of time–varying firm and
industry-average characteristics as defined in Panel A of Table 1. For parsimony we do not tabulate coefficients for
the control variables and fixed effects. All variables are defined in Appendix A. t–statistics are reported below
coefficient estimates and are calculated based on robust standard errors clustered by industry. *, **, *** indicate
statistical significance (two–sided) at the 0.1, 0.05, and 0.01 levels, respectively.
Panel A. Cash ETR
Dependent variable: Cash ETRijt Cash ETRijt Cash ETRijt Cash ETRijt
(1) (2) (3) (4)
Treated Irish Exposureij –0.000 0.008 · ·
(–0.01) (0.49) · ·
Post 1997t ×Treated Irish Exposureij –0.029** –0.038** –0.028* –0.052*
(–2.11) (–2.32) (–1.94) (–1.81)
Observations 8,329 8,329 8,329 8,329
R2 0.043 0.150 0.428 0.501
Panel B. GAAP ETR

Dependent variable: GAAP ETRijt GAAP ETRijt GAAP ETRijt GAAP ETRijt
(1) (2) (3) (4)
Treated Irish Exposureij –0.018* –0.001 · ·
(–1.91) (–0.07) · ·
Post 1997t ×Treated Irish Exposureij –0.043*** –0.068*** –0.033*** –0.069***
(–3.90) (–5.25) (–2.62) (–3.53)
Observations 8,329 8,329 8,329 8,329
R2 0.085 0.185 0.508 0.569
- 56 -

Table 4. Irish-haven Economic Mechanisms
This table reports OLS estimates of the following difference–in–differences specification using sample restrictions
based on the economic mechanisms as defined in Appendix A:
firms, industries, and years, respectively. Panel A presents results from using Cash ETR as a measure of Tax Planning.
Panel B presents results from using GAAP ETR as a measure of tax planning. Controls is a vector of time–varying
firm and industry-average characteristics as defined in Panel A of Table 1. For parsimony we do not tabulate
coefficients for the control variables and fixed effects. For parsimony we do not tabulate coefficients for our control
variables and estimated fixed effects. All variables are defined in Appendix A. t–statistics are reported below
coefficient estimates and are calculated based on robust standard errors clustered by industry. *, **, *** indicate
statistical significance (two–sided) at the 0.1, 0.05, and 0.01 levels, respectively.
Panel A. Industry Leader, Learning, and Enforcement Herding: Cash ETR

Dependent variable: Cash ETRijt
(1) (2) (3) (4)
Treated Irish Exposureij 0.020 –0.060** –0.010 –0.048**
(0.69) (–2.04) (–0.63) (–2.48)
Post Rate Cutt ×Treated Irish Exposureij –0.135*** –0.028* –0.023* –0.025**
(–3.73) (–1.97) (–1.75) (–2.16)
Year Fixed Effects Yes Yes Yes Yes
Sample restriction Large Firm = Above Industry ETR =
1 0 1 0
Observations 1,079 20,411 8,163 13,327
R2 0.179 0.105 0.143 0.136
Panel B. Industry Leader, Learning, and Enforcement Herding: GAAP ETR

Dependent variable: GAAP ETRijt
(1) (2) (3) (4)
Treated Irish Exposureij –0.045* –0.065* –0.007 –0.070**
(–1.74) (–1.78) (–1.00) (–2.30)
Post Rate Cutt × Treated Irish Exposureij –0.071** –0.028** –0.006 –0.035**
(–2.32) (–2.09) (–0.77) (–2.13)
1 0 1 0
Observations 1,079 20,411 9,581 11,909
R2 0.235 0.127 0.112 0.151
- 57 -

Table 5. Falsification Tests: Placebo Analysis
𝑃𝑟𝑒𝑡𝑎𝑥 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤𝑖𝑗𝑡 = 𝛼 + 𝛽1 𝑇𝑟𝑒𝑎𝑡𝑒𝑑𝑖𝑗 + 𝛽2 𝑇𝑟𝑒𝑎𝑡𝑒𝑑𝑖𝑗 × 𝑃𝑜𝑠𝑡𝑡 + Γ𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 + 𝜀𝑖𝑗𝑡
Where i, j, and t index firms, industries, and years, respectively. Controls is a vector of time–varying firm and industry-
average characteristics as defined in Panel A of Table 1. For parsimony we do not tabulate coefficients for the control
variables and fixed effects. All variables are defined in Appendix A. t–statistics are reported below coefficient
estimates and are calculated based on robust standard errors clustered by industry. *, **, *** indicate statistical
significance (two–sided) at the 0.1, 0.05, and 0.01 levels, respectively.
Dependent variable: Pretax Cash Flowijt

(1)
Treated Irish Exposureij 0.008
(1.36)
Post Rate Cutt × Treated Irish Exposureij –0.011
(–1.51)
Firm Controlsijt–1 Yes
Industry Average Controls–ijt–1 Yes
Year Fixed Effects Yes
Observations 19,851
R2 0.140
- 58 -

Table 6. Competitor Classification Robustness: Hoberg and Phillips Industries
firms, industries, and years, respectively. We define industries for all covariates constructed in this table by FIC 50
code (Hoberg and Phillips, 2010; 2016)—Treated is an indicator equal to one if firm i has competitors in industry j
that have operations in Ireland, and zero otherwise. Post Rate Cut is an indicator equal to one after 1998, which
corresponds to the beginning of the progressive reduction of corporate tax rates in Ireland. Controls is a vector of
time–varying firm and industry-average characteristics as defined in Panel A of Table 1. For parsimony we do not
tabulate coefficients for the control variables and fixed effects. All variables are defined in Appendix A. t–statistics
are reported below coefficient estimates and are calculated based on robust standard errors clustered by industry. *,
**, *** indicate statistical significance (two–sided) at the 0.1, 0.05, and 0.01 levels, respectively.
Dependent variable: Cash ETRijt GAAP ETRijt

(1) (2)
Treated Irish Exposureij 0.042 0.058**
(1.61) (2.55)
Post Rate Cutt × Treated Irish Exposureij –0.044* –0.064***
(–1.94) (–2.96)
Firm Controlsijt–1 Yes Yes
Industry Average Controls–ijt–1 Yes Yes
Year Fixed Effects Yes Yes
Observations 21,490 21,490
R2 0.100 0.127
- 59 -

Table 7. Long-Run Tax Planning
𝐿𝑜𝑛𝑔 𝑅𝑢𝑛 𝑇𝑎𝑥 𝑃𝑙𝑎𝑛𝑛𝑖𝑛𝑔𝑖𝑗𝑡 = 𝛼 + 𝛽1 𝑇𝑟𝑒𝑎𝑡𝑒𝑑𝑖𝑗 + 𝛽2 𝑇𝑟𝑒𝑎𝑡𝑒𝑑𝑖𝑗 × 𝑃𝑜𝑠𝑡𝑡 + Γ𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 + 𝜀𝑖𝑗𝑡
Where Long Run Tax Planning is measured as one of the long–run tax planning measures as defined in Appendix A,
and i, j, and t index firms, industries, and years, respectively. Treated is an indicator equal to one if firm i has
competitors in industry j that have operations in Ireland, and zero otherwise. Post is an indicator equal to one after
1998, which corresponds to the beginning of the progressive reduction of corporate tax rates in Ireland. Controls is a
vector of time–varying firm and industry-average characteristics as defined in Panel A of Table 1. All variables are
defined in Appendix A. t–statistics are reported below coefficient estimates and are calculated based on robust standard
errors clustered by industry. *, **, *** indicate statistical significance (two–sided) at the 0.1, 0.05, and 0.01 levels,
respectively.
3-Year Cash 5-Year Cash 3-Year GAAP 5-Year GAAP

Dependent variable: ETRijt ETRijt ETRijt ETRijt
(1) (2) (3) (4)
Treated Irish Exposureij 0.007 0.015 –0.010 –0.007
(0.41) (1.04) (–0.90) (–0.65)
Post Rate Cutt × Treated Irish Exposureij –0.056** –0.070*** –0.048** –0.057***
(–2.43) (–3.52) (–2.42) (–3.36)
Competitor Average Controls–ijt–1 Yes Yes Yes Yes
Observations 18,987 14,916 19,250 15,502
R2 0.101 0.087 0.101 0.097
- 60 -

Table 8. Delaware-haven Differences–in–Differences Analysis
This table reports OLS estimates of the following differences–in–differences specification:
𝑆𝑡𝑎𝑡𝑒 𝐸𝑇𝑅𝑖𝑗𝑡 = 𝛼 + 𝛽1 𝑇𝑟𝑒𝑎𝑡𝑒𝑑𝑖𝑗 + 𝛽2 𝑃𝑜𝑠𝑡𝑡 + 𝛽3 𝑇𝑟𝑒𝑎𝑡𝑒𝑑𝑖𝑗 × 𝑃𝑜𝑠𝑡𝑡 + Γ𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 + 𝜀𝑖𝑗𝑡
Where Tax Planning is measured as State ETR as defined in Appendix A, and i, j, and t index firms, industries, and years, respectively. Treated is an indicator
equal to one if a firm’s subsidiary i has competitors—defined as firms with the same three-digit SIC code—in industry j that have operations in Delaware, and zero
otherwise. Post is an indicator equal to one after years during which separate reporting or no economic nexus state laws were enacted, and zero otherwise. All
Treated, Post, and Treated×Post variables are aggregated up to the firm-year level using subsidiary-weighted averages. Controls is a vector of time–varying firm,
industry, and state-average characteristics as defined in Panel B of Table 1. For parsimony we do not tabulate coefficients for the control variables and fixed effects.
All variables are defined in Appendix A. t–statistics are reported below coefficient estimates and are calculated based on robust standard errors clustered by state
of incorporation. *, **, *** indicate statistical significance (two–sided) at the 0.1, 0.05, and 0.01 levels, respectively.
Dependent variable: State ETRijt State ETRijt State ETRijt State ETRijt State ETRijt State ETRijt
(1) (2) (3) (4) (5) (6)
Avg(Competitor DE PICijt × Post Lawist) 0.004** 0.005** 0.004* 0.004** 0.003 0.001
(2.20) (2.30) (1.88) (2.09) (1.45) (0.26)
Avg(Competitor DE PICijt) –0.013 –0.016 –0.012 –0.012 –0.005 0.026**
(–1.65) (–1.62) (–1.66) (–1.60) (–0.45) (2.07)
Avg(Competitor Post Lawist) –0.008 –0.006 –0.010 –0.011** 0.004 –0.004
(–0.88) (–0.71) (–1.33) (–2.02) (0.36) (–0.75)
Avg(Own DE PICijt) –0.018*** –0.018*** –0.018*** –0.019*** –0.021*** –0.014***
(–3.50) (–3.69) (–3.63) (–3.67) (–4.39) (–3.58)
Avg(Own Post Lawist) –0.002 –0.001 –0.005* –0.001 –0.005* 0.001
(–1.01) (–0.56) (–1.73) (–0.61) (–1.76) (0.25)
Avg(Own DE PICijt × Post Lawist) 0.015* 0.016* 0.014 0.014 0.015** 0.003
(1.93) (1.88) (1.62) (1.54) (2.08) (0.35)
Firm Controlsijt–1 Yes Yes Yes Yes Yes Yes
Competitor Average Controls-ijt-1 Yes Yes Yes Yes Yes Yes
State Controlsijt-1 Yes Yes Yes Yes Yes Yes
Competitor State Average Controls-ijt-1 Yes Yes Yes Yes Yes Yes
Firm,
State-Year,
Fixed Effects Year Region-Year State State-Year Industry-Year & Industry-Year
Observations 8,618 8,044 8,618 8,618 8,618 8,618
R-squared 0.038 0.052 0.096 0.172 0.329 0.414
- 61 -

Table 9. Delaware-haven Economic Mechanisms
𝑆𝑡𝑎𝑡𝑒 𝐸𝑇𝑅𝑖𝑗𝑡 = 𝛼 + 𝛽1 𝑇𝑟𝑒𝑎𝑡𝑒𝑑𝑖𝑗 + 𝛽2 𝑃𝑜𝑠𝑡𝑡 + 𝛽3 𝑇𝑟𝑒𝑎𝑡𝑒𝑑𝑖𝑗 × 𝑃𝑜𝑠𝑡𝑡 + Γ𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 + 𝜀𝑖𝑗𝑡
Where Tax Planning is measured as either State ETR as defined in Appendix A, and i, j, and t index firms, industries,
and years, respectively. Treated is an indicator equal to one if a firm’s subsidiary i has competitors—defined as firms
with the same three-digit SIC code—in industry j that have operations in Delaware, and zero otherwise. Post is an
indicator equal to one after years during which separate reporting or no nexus state laws were enacted, and zero
otherwise. All Treated, Post, and Treated×Post variables are aggregated up to the firm-year level using subsidiary-
weighted averages. Controls is a vector of time–varying firm, industry, and state-average characteristics as defined in
Panel B of Table 1. For parsimony we do not tabulate coefficients for the control variables and fixed effects. Controls
is a vector of time–varying firm, industry, and state-average characteristics as defined in Panel B of Table 1. For
parsimony we do not tabulate coefficients for the control variables and fixed effects. All variables are defined in
Appendix A. t–statistics are reported below coefficient estimates and are calculated based on robust standard errors
clustered by state of incorporation. *, **, *** indicate statistical significance (two–sided) at the 0.1, 0.05, and 0.01
levels, respectively.
Dependent variable: State ETRijt

(1) (2) (3) (4)
Avg(Competitor DE PICijt × Post Lawist) –0.008 0.006** 0.014** 0.001
(–1.08) (2.45) (2.31) (1.11)
Delaware-haven Own Treatment Variables Yes Yes Yes Yes
Competitor Average Controls-ijt-1 Yes Yes Yes Yes
State Controlsijt-1 Yes Yes Yes Yes
Competitor State Average Controls-ijt-1 Yes Yes Yes Yes
1 0 1 0
Observations 2,434 6,184 3,683 4,935
R2 0.027 0.028 0.088 0.196
- 62 -

Table 10. Falsification Tests: Placebo Analysis
𝑃𝑟𝑒𝑡𝑎𝑥 𝑃𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒𝑖𝑗𝑡 = 𝛼 + 𝛽1 𝑇𝑟𝑒𝑎𝑡𝑒𝑑𝑖𝑗 + 𝛽2 𝑇𝑟𝑒𝑎𝑡𝑒𝑑𝑖𝑗 × 𝑃𝑜𝑠𝑡𝑡 + Γ𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 + 𝜀𝑖𝑗𝑡
Where Pretax Performance is measured as Pretax Cash Flow, as defined in Appendix A, and i, j, and t index firms,
industries, and years, respectively, and replicates our Delaware-haven analysis using Pretax Performance as an
outcome variable instead of Tax Planning. ΓControls is a vector of time–varying firm, industry, and state-average
characteristics as defined in Panel B of Table 1. For parsimony we do not tabulate coefficients for the control variables
and fixed effects. All variables are defined in Appendix A. t–statistics are reported below coefficient estimates and
are calculated based on robust standard errors clustered by state of incorporation. *, **, *** indicate statistical
significance (two–sided) at the 0.1, 0.05, and 0.01 levels, respectively.
Dependent variable: Pretax Cash Flowijt

(1)
Avg(Competitor DE PICijt × Post Lawist) 0.006
(1.35)
Delaware-haven Own Treatment Variables Yes
Firm Controlsijt–1 Yes
Competitor Average Controls-ijt-1 Yes
State Controlsijt-1 Yes
Competitor State Average Controls-ijt-1 Yes
Year Fixed Effects Yes
Observations 8,616
R2 0.584
- 63 -

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Strategic Reactions in Corporate Tax Planning

First Draft: January 15, 2016

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and Tirole, 1984; Boone, 2000; Leary and Roberts, 2014).1

to seem particularly aggressive.

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the total effect of a given tax policy.

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overstated if there are negative strategic reactions.

extent there is a strategic component of firms’ tax planning decisions.

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complementarities in firms’ tax planning (Bulow et al., 1985).

Our estimates of the magnitude of the strategic complementarities are economically

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percentage point reduction in their GAAP ETR).6

Having documented evidence of economically significant strategic complementarities in

responsive to changes in their competitors’ tax planning.

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Roberts, 2014; Xiao, 2017).

alternative explanations. We do so by repeating each of our primary difference-in-differences

income in either research setting.

policy, our evidence of strategic reactions contributes to the literature by documenting an

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associated with strategic interactions.

and Section 6 concludes.

2. Background and Motivation

2.1. Strategic reactions in corporate tax planning

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decisions are described as “strategic complements.”

them from pursuing a tax planning strategy.

that tax planning strategies propagate along supply chains.

tax-advantaged banks leads to an increase in the tax aggressiveness of other banks).

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management incentives. In contrast to their findings, we document evidence of strategic

producing these strategic complementarities.

2.2. The reflection problem

The inherently simultaneous nature of strategic reactions makes it challenging to

Yi   0  Y Y j   X' X i   X' X j   Z' Z j   i , (1)

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captured by the coefficients on 𝑋̅𝑗 .

because of a direct strategic reaction, which is referred to as an outcome-on-outcome effect, and is

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firm-level characteristics within industries (i.e., correlated effects).

2.3. Alternative designs for identifying strategic reactions8

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2.3.1. “Coarsening” the unit of analysis

2.3.2. Exclusion of certain group-level averages as contextual effects

A necessary condition for identification is the existence of at least one individual

car purchases. They do so by excluding the neighborhood averages of demographic characteristics

2.3.3. Non-linear and dynamic models

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2.3.4. Variance-based approaches

multipliers”—whereby endogenous interactions amplify differences in average group behavior—

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As noted in Section 2, it is challenging to empirically identify direct (i.e., outcome-on-

reactions—firms responding to their competitors, and vice versa—produces near perfect