*Contact the authors at: Michael Dambra (corresponding author), mjdambra@buffalo.edu; Matthew Gustafson,

mtg15@psu.edu; and Phillip Quinn, philq@uw.edu. We thank Brad Badertscher, Shane Heitzman, Jeff Hoopes, Bill

Kross, Steven Savoy, Jake Thornock, Erin Towery, Steven Utke, David Weber, John Wertz, and Ryan Wilson for

helpful comments and suggestions. We also thank Yan Zhao for excellent research assistance and Scott Dyreng for

sharing subsidiary location data. The authors gratefully acknowledge the generous financial support from their

respective institutions.

Pre-IPO Trusts, Private Information, and Corporate Spillover

Michael Dambra

University at Buffalo

Matthew Gustafson

Pennsylvania State University

Phillip Quinn

University of Washington

March 18, 2017

Abstract: Twenty-three percent of CEOs place equity in tax-advantaged trusts prior to an IPO.

Tax-advantaged trust ownership positively predicts one-year post-IPO abnormal returns, but only

for firms with high informational asymmetry. Because trusts generate larger tax benefits when

trust assets increase in value, this finding is consistent with CEOs having private information

prior to their IPO. We also document a positive relation between trust ownership and corporate

tax avoidance, suggesting that CEOs’ personal tax preferences spill over into corporate tax

policy. Thus, trust establishment is a personal finance decision that reveals information about

subsequent firm performance and policies.

1

Investors are focusing on Facebook’s offering price as the company prepares to go public as

soon as next week. Tax specialists are paying attention to something else: how half a dozen of the

firm’s luminaries, including founder Mark Zuckerberg, appear to be using a perfectly legal

maneuver called a grantor-retained annuity trust, or GRAT, to avoid at least $200 million of

estate and gift taxes.

─ Laura Saunders, The Wall Street Journal, May 11th 2012

1. Introduction

The initial public offering (IPO) process is a watershed event for most corporate

executives that has significant implications on their personal wealth. During this process,

executives work closely with investment bankers, lawyers, the Securities and Exchange

Commission (SEC), and equity analysts, as the company is marketed to and scrutinized by

potential investors. At the same time, executives face some of the most important personal

finance decisions of their lives. In this paper, we hand-collect data on one such decision: the

percentage of a chief executive officer’s (CEO) shares in his firm that he places into a tax-

advantaged trust. As suggested by the quote above, establishing a tax-advantaged trust prior to an

IPO can result in substantial personal tax savings. Establishing a trust, however, comes with

costs, such as legal fees, trustee fees, and potentially a reduction in control. We exploit this rare

ability to observe a large scale personal finance decision of CEOs at the time of the IPO to

provide new evidence on (1) whether CEOs have private information at the time of the IPO, and

(2) whether CEOs’ large scale personal tax decisions are predictive of corporate tax strategy.

To investigate these questions, we hand-collect a sample of CEO characteristics,

including trust establishments, from over 1,600 IPOs between 1997 and 2013. We develop a

classification system which bifurcates our sample into two main types of trusts, non-tax-

advantaged (e.g., living wills) and tax-advantaged (e.g., GRATs). Twenty-three percent of

CEOs transfer some portion of share ownership into a tax-advantaged trust, while four percent

place shares into a non-tax-advantaged trust. The average CEO with a trust places one-third of

2

their total shareholdings into it. Tax-advantaged trust use is most common when the tax benefits

of doing so are highest, such as when combined federal and state estate tax rates are higher, or

the CEO is a founder, and thus likely to have low tax bases. In contrast, most firm

characteristics, including firm size and profitability, do not predict tax-advantaged trust use.

Thus, trust establishment appears to be a personal finance decision that CEOs use to reduce

personal taxes.

Given that an important input into CEOs’ personal finance decisions is their private

information (Seyhun, 1986; Jenter, 2005), pre-IPO trust establishments have the potential to

provide new evidence on the extent to which a CEO has private information at the time of the

IPO. In particular, if CEOs have private information, the establishment of a pre-IPO trust should

be positively related to future returns. By placing pre-IPO equity into tax-advantaged trusts,

executives can bequest shares in a manner that avoids future capital gains and estate taxes. The

most significant tax saving benefit of such trusts, however, is realized when the assets placed in

the trust (e.g., shares of stock at IPO) appreciate in value. In contrast, if the trust assets decline in

value, CEOs still bear the costs of establishing a trust, along with potential gift taxes at the time

of transfer. Thus, rational CEOs will evaluate their firm’s prospects and place more shares into a

trust when they believe their firm is undervalued.

Although existing literature documents some cases in which CEOs possess private

information regarding future firm performance,1 the extent to which they have such information

at the time of the IPO is an unanswered empirical question. The IPO process contains many

features designed to mitigate informational asymmetries between management and investors.

Not only do underwriters spend months conducting due diligence and marketing the offering, but

1 For example, see Bartov and Mohanram (2004), Jeng, Metrick, and Zeckhauser (2003), Jagolinzer (2009), and

Dittmar and Field (2015).

3

underwriters also certify the offering (e.g., Campbell and Kracaw, 1980), and IPO underpricing

incentivizes investors to acquire information (Chemmanur, 1993). Empirically identifying the

extent to which CEOs have pre-IPO private information is complicated by the fact that observed

pre-IPO trades by CEOs do not necessarily reflect their private information. For example, Ang

and Brau (2003) find that CEOs take steps to conceal their pre-IPO sales in order to avoid

sending a negative signal to investors.

In contrast, CEOs have no incentive to hide their trust use, because trusts should

represent a positive signal to the market. We argue that this makes trust use a more reliable

signal of a CEO’s pre-IPO private information. Consistent with CEOs having private information

at the time of the IPO, the abnormal stock returns of IPO issuers with CEOs using a tax-

advantaged trust are approximately 10 (7) percent higher in the first year compared to other IPO

issuers on average (at the median). The magnitude of outperformance is approximately 7 (9)

percentage points larger if we include first day returns (i.e., IPO underpricing) and is increasing

in the percentage of shares that CEOs place into tax-advantaged trusts – a one standard deviation

increase in the percentage of shares that a CEO places into a tax-advantaged trust is associated

with 4.1 percent higher first-year returns.

If these abnormal returns are attributable to the CEOs’ private information, as opposed to

risks that disproportionately affect firms with trusts (and are not fully controlled for by our size

and book-to-market matching procedure), then the post-IPO abnormal returns associated with

trust usage should dissipate over time as pre-IPO information becomes less relevant. We find

evidence of such dissipation, as the abnormal returns associated with trust usage are concentrated

in the first, and depending on the empirical specification possibly the second, year following the

IPO. The market appears to incorporate this information within two years, as the association

4

between the percent of shares transferred into a tax-advantaged trust and subsequent abnormal

returns is not statistically significant.

Finally, we investigate whether the prevalence of private information is concentrated in

the CEOs governing certain types of firms. We find that trusts are associated with future

abnormal returns only for firms with high levels of informational asymmetry, such as young

firms, R&D intensive firms, and those that are operating at a loss. These findings suggest (1) the

IPO process subsumes any value relevant information the CEO has only for non-informationally

sensitive firms, and (2) for informationally sensitive firms, the trust establishment decision

incorporates the CEO’s private information.

Our second question builds in part off the idea that CEOs’ personal finance decisions

spill over into their corporate policies (e.g., Bartov and Mohanram, 2004; Jenter, 2005). Given

that trusts proxy for personal tax avoidance, this logic suggests that there may be a positive

relation between trust usage and corporate tax avoidance. Alternatively, CEO trust use may be

negatively related to corporate tax avoidance if trust use increases the scrutiny of a firm’s tax

policy (Dyreng, Hoopes, and Wilde, 2016; Mider, 2013). Indeed, Hanlon and Heitzman (2010)

highlight the relation between personal and corporate tax avoidance as an unsettled empirical

question.

An important reason why this question has not been thoroughly answered in the literature

is the lack of data on executives’ personal finance decisions. There are few measures of personal

tax avoidance in the literature (Kopczuk, 2013; Gale and Slemrod, 2001), and the measures that

do exist are limited, often involve illegalities, endogenous interactions with the board of

directors, or require unique compensation contracts (Armstrong and Larcker, 2009). For

example, Chyz (2013), who provides the only evidence that personal and corporate tax policies

5

are positively related, proxies for personal tax avoidance with stock option exercise backdating

(Dhaliwal, Erickson, and Heitzman, 2009). We fill this void in the literature by introducing trust

establishments as a new proxy for a CEO’s personal tax avoidance strategy. Trust establishments

represent legal, large-scale personal tax decisions which are not as susceptible to the limitations

noted above.

We find evidence that CEOs with tax-advantaged trusts operate firms that more actively

avoid corporate taxes. CEO trust usage is associated with lower long-run GAAP effective tax

rates and cash taxes paid. CEO trust usage is also positively associated with the volatility of cash

effective tax rates and unrecognized tax benefits. Given that these associations hold after

controlling for common determinants of tax avoidance, this evidence is consistent with the joint

hypothesis that trusts proxy for a CEO that actively manages his personal taxes and that CEOs’

personal tax avoidance positively relates to the aggressiveness of their corporate tax policies.

Next, we examine a specific mechanism for achieving corporate tax avoidance: tax

havens. We find that CEO trust usage is associated with greater tax haven usage, and we also

find that CEO trust usage is positively associated with the probability of a firm reporting a dot

tax haven subsidiary. The latter result is consistent with CEOs that use trusts also engaging in

aggressive tax avoidance strategies to minimize their corporate tax bill. Further, we are unaware

of any other studies documenting that the CEOs who use complex legal structures to avoid

personal taxes do the same for the corporations they manage. These results contribute to the

emerging literature on the relation between personal tax preferences and corporate behavior by

identifying a new variable for individual tax preferences.

More broadly, our paper contributes to the literature linking personal attributes or

incentives to corporate outcomes (e.g., Jensen and Murphy, 1990; Bertrand and Schoar, 2003;

6

Malmendier and Tate, 2005; Dyreng, Hanlon, and Maydew, 2010; Ge, Matsumoto, and Zhang,

2011). Importantly, trust usage is publicly available, directly observable to all researchers, and

not related to compensation decisions made by the board of directors. In this manner, our

findings relate to the recent literature suggesting that CEO pilot licenses relate to corporate risk

taking (Cain and McKeon, 2016) and innovation (Sunder, Sunder, and Zhang, 2017), and CEOs’

previous employment and off-the-job behaviors impact financial and reporting policies (Custodio

and Metzger, 2014; Davidson, Dey, and Smith, 2015).

Our paper also contributes to the literature on the extent to which CEOs have private

information regarding future firm performance. Jeng, Metrick, and Zeckhauser (2003), Bartov

and Mohanram (2004), and Jagolinzer (2009) all provide evidence that insiders earn abnormal

returns on their personal trades, and Dittmar and Field (2015) show that firms successfully time

their open market share repurchases. We show that this information advantage extends to the

IPO setting, even though the IPO process is designed to mitigate such informational

asymmetries.

Finally, our paper sheds new light on executives’ gift and estate planning strategies.

Anecdotal evidence suggests that tax-advantaged trusts have cost the federal government over

$100 billion in lost tax revenues since 2000 (Lund, 2013). The CEO of Las Vegas Sands,

Sheldon Adelson, alone saved $3 billion in gift and estate taxes from using tax-advantaged trusts

(Mider, 2013). Given the lack of available data, however, research has been scarce in this area

(Heitzman and Hanlon, 2010; Tsoutsoura, 2015). We observe that CEOs engage in more

complex tax planning strategies in the presence of future estate tax liabilities, providing new

evidence that personal tax liabilities appear to have a first-order effect on CEO behavior.

2. Trusts

7

This section describes how trusts operate in the broader context of estate planning and the

benefits of transferring share ownership to trusts. When individuals die without formalizing

plans to distribute their assets, state laws dictate the distribution of the individuals’ estates

through court-supervised probate procedures (American Bar Association, 2012). Estate planning

allows individuals, rather than state laws, to determine the distribution of their estates. Estate

planning involves formalizing plans to transfer assets to preferred beneficiaries.

2.1 Background on trusts

A grantor forms a trust with a trustee through a trust instrument, which establishes the

trust’s beneficiaries and assets.2 The costs of establishing a trust include legal fees to draft the

trust instrument, trustee fees, and tax preparation fees for preparing the trust returns. Anecdotal

evidence suggests annual fees typically range from 0.5 to 2.0 percent, depending on the trust’s

assets and complexity (Feldman, 2015). Transferring shares to tax-advantaged trusts may cause

the CEOs to forfeit significant control rights, and in instances when the trust retains income, that

income faces high tax rates. In our paper, we categorize trusts into two types. Tax-advantaged

trusts (e.g., irrevocable trusts) move assets out of the immediate control of the grantor and

exclude the assets from the grantor’s estate. If a gift exceeds certain monetary thresholds, gift

taxes may be assessed based on the fair market value of the assets transferred at the time of the

gift. Therefore, grantors who expect that their assets will appreciate in value often establish tax-

advantaged trusts to not only remove the assets from their estate, but also remove all future asset

appreciation. In non-tax-advantaged (e.g., revocable) trusts, the grantor retains ownership of the

assets, which remain part of the grantor’s estate. Non-tax-advantaged trusts provide no

immediate taxable event, but do offer other benefits to grantors, such as financial privacy.

2 The general term for a person who establishes a trust is a grantor or a settlor, and a trustee is the person or

company that manages the trust’s assets.

8

Wealthy grantors use tax-advantaged trusts to achieve considerable savings on estate and

gift taxes. One popular estate planning strategy to reduce future estate taxes is a grantor-retained

annuity trust (GRAT). Under a GRAT, the grantor first places assets, such as shares of stock, in

the GRAT in exchange for a note payable, with a minimum interest rate set by the IRS. During

the term of the GRAT, annuity payments flow to the grantor in accordance with the parameters

of the trust. If the value of the trust assets appreciates at a rate in excess of the interest rate over

the life of the GRAT, then the net appreciation passes to the heirs free of gift or estate taxes. If

the value of the shares declines or increases at a rate below the interest rate, however, the shares

pass back to the grantor, and the heirs incur no loss or tax. The net result is that GRATs provide

grantors with the opportunity to benefit from substantial tax savings, but only when the trust

assets appreciate.3 Price and Donaldson (2015, §9.10) note several tax-advantaged trusts provide

tax benefits similar to GRATs.

2.2 Trusts and initial public offerings

As previously noted, tax-advantaged trusts are most useful when the shares that the CEO

places in the trust appreciate in value. This aspect of tax-advantaged trusts makes establishing a

trust before an IPO especially attractive. Serafin (2013) notes “For every company that goes

public… many more employees and investors can find themselves sitting on a windfall -- and

trusts can be a key tool in minimizing the taxes owed when cashing in on that windfall.” Before

the IPO, private share valuations receive a liquidity discount of up to 30 percent versus an IPO

3 As an example, assume a CEO places $100 million of shares in a two-year GRAT with equal annuity payments.

The shares appreciate 10% annually and the interest rate is 4.0%. The annuity that the CEO receives equals the

present value of a two-period annuity with an interest rate of 4.0% (i.e., 1.8861 =1−(1+.04)−2

.04). After the first year,

the shares are worth $110 million, and the CEO receives an annuity payment of $53,019,458 (i.e., $100 million /

1.8861) and the remaining shares are worth $56,980,542. After the second year, the remaining shares, which have

growth of 10% in the second year, are now worth $62,678,596, and the CEO receives the second annuity payment of

$53,019,458. The remainder, $9,659,138 of shares, passes to the heirs free of gift or estate taxes.

9

offer price (Brady, 2006; Pratt, 2009). Further, immediately following the IPO, public shares

generate a significant day one price appreciation on average.

In contrast to the significant benefits of establishing a tax-advantaged trust before the

IPO, there is no clear change in the costs of establishing a trust prior to an IPO. Legal fees are

unlikely to depend on when the trust is established. Given that estate and gift taxes are assessed

based on the fair market value of stock transferred to descendants, we view the pre-IPO venue as

a powerful setting to investigate how executives utilize trusts to minimize personal taxes.4

3. Data and Setting

3.1 Sample

Our sample begins with all IPOs in Thompson’s SDC database from 1997, when

prospectuses became available on EDGAR, through 2013. We employ sample filters common to

the IPO literature. We exclude financial industries (including REITs), IPOs with proceeds below

$5 million, best efforts offerings, rights offerings, shell companies, limited partnerships, and

firms with issue prices less than $5 per share or missing stock returns data from CRSP.5 Unlike

most IPO studies, we further restrict our sample by requiring non-missing financial statement

data for the fiscal year immediately prior to going public from Compustat. We also obtain

subsidiary disclosures from Exhibit 21 of the 10-K from Scott Dyreng’s website (e.g., Dyreng

and Lindsey, 2009), federal and state estate tax rate information from Wolters Kluwer, and IPO-

related information from SDC. Finally, to be included in our sample, we also require that the

4 A more general setting of how CEOs use trusts after IPOs may provide additional insights, but trust usage after

IPOs will be less likely to capture personal tax avoidance as opposed to other factors. 5 Shobe (2016) notes that the tax arbitrage benefits of supercharging an IPO only exist when the pre-IPO firm is a

partnership. Thus, our results are not confounded by supercharged IPOs (e.g., Edwards, Hutchens, and Rego, 2016).

10

CEO holds a non-zero share position in the company prior to the IPO. Our final sample contains

1,611 IPOs.

3.2 Identifying CEO Trust Use

From this sample, we read the most recent prospectuses available on EDGAR as of the

IPO date (typically Form 424B). We hand-collect CEO characteristics, including the number of

common shares owned pre-IPO, age, and whether the CEO was listed as a founding member of

the issuer.6 The notes of the ‘Principal and Selling Stockholders’ table contains trust information

for each CEO. Although trusts are confidential agreements, the SEC requires that executives

disclose all beneficial ownership of shares held by the executive and certain members of the

executive’s family. We record the number of shares the CEO transfers into a trust. This

disclosure allows us to identify the number of shares transferred to a trust by the CEO.

Next, we use the name of the trust to determine whether the trust is likely to provide tax

advantages. Per discussion with estate planning consultants, the name of the trust typically (but

not always) indicates the type of the trust established. This procedure allows us to separate trusts

that lack immediate tax advantages (e.g., living wills) from trusts with significant tax advantages

(e.g., irrevocable trusts). We classify all trusts with names containing ‘revocable’, ‘living’,

‘marital’, and ‘community property’ as non-tax-advantaged trusts (NTA Trust). All other types of

trusts, including annuity trusts, children’s trusts, generation-skipping trusts, gift trusts,

descendent trusts, qualified terminable interest property trusts, and GRATs, are classified as tax-

advantaged trusts (TA Trust). Table 1 contains detailed definitions for all variables used in our

analysis.

6 If the issuing firm did not list a CEO in the prospectus, we collected the information on the first executive listed in

the ‘Management’ section of the prospectus (such as the President). We refer to such all individuals as CEOs, even

though their titles may differ slightly.

11

Appendix A provides an excerpt from the pre-IPO prospectus of Greenlight Capital Re,

Ltd. (GLRE) from Form 424 dated May 24, 2007 to illustrate our hand-collected trust data. For

GLRE, the CEO, David Einhorn, transferred 3,623,370 shares into the David M. Einhorn 2007

GRAT. This amount represents 100 percent of the executive’s total shareholdings. The Form

424 indicates that the transfer of stock into the trust occurred on April 20, 2007. The transfer of

assets into the trust shortly before the IPO date is consistent with Brady (2006), who notes that

the tax savings from trusts are concentrated before the shares become liquid at the initial public

offering.

3.3 Descriptive statistics

Table 2 provides descriptive statistics. Slightly over one fourth of CEOs hold some

portion of their shares in trusts, which is consistent with existing evidence that a large portion of

firm ownership is controlled by trusts (Villalonga and Amit, 2009; Gadhoum, Lang, and Young,

2005). Trusts hold 9.8% of the CEOs’ total shares (Trust). Conditional on using a trust, CEOs

place 38.1% of their holdings into trusts, resulting in the average trust-held shares being worth

$78.5 million at the IPO price (untabulated). According to our classification system,

approximately 23.2 percent of CEOs transferred shares into tax-advantaged trusts, while less

than 4 percent used non-tax-advantaged trusts. Figure 1 shows that trust utilization has been

relatively consistent throughout our sample period with tax-advantaged trust establishments

ranging from a low of 15 percent in 2006 to a high of 35 percent in 2011.

The average (median) CEO in our sample is 48 (48) years old, holds $50.9 ($15.9)

million worth of shares of the issuer prior to the IPO. Approximately 42 percent of CEOs are

founding members of the firm. From Wolters Kluwer, we collect federal and state estate tax

rates based on the IPO year and headquarter-state location of our issuers. Over our sample

12

period, federal estate taxes ranged from zero percent (in 2010) to 55 percent (from 1997 through

2001), and state estate taxes ranged from zero percent to 19 percent. Our sample provides both

cross-sectional and time series variation in estate tax rates. Given these descriptive statistics, our

sample provides unique insight into the tax planning strategies of high-net worth individuals.

4. Determinants of trust usage

In this section we explore the determinants of trust ownership. This section serves several

purposes. First, insofar as tax-advantaged trusts are significantly associated with tax incentives,

this exploration provides support for our trust classification method. Second, trusts are frequently

deployed by high net worth individuals and to our knowledge there is no large scale evidence on

how trusts are used, especially among executives (Hanlon and Heitzman, 2010), making the

determinants of trust usage interesting in their own right. Last, if trusts are used rationally, they

may provide new insight into CEOs’ individual tax preferences and ultimately may relate to

corporate-level outcomes.

4.1 Economic Determinants of Trust Usage Model

We employ both an ordinary least squares (OLS) regression and a Tobit to investigate the

determinants of trust usage:

𝑇𝑟𝑢𝑠𝑡 = 𝛽0 + 𝛽1𝐿𝑛𝐴𝑔𝑒 + 𝛽2𝐹𝑜𝑢𝑛𝑑𝑒𝑟 + 𝛽3𝐿𝑛𝐸𝑞𝑢𝑖𝑡𝑦𝑊𝑒𝑎𝑙𝑡ℎ + 𝛽4𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥𝑒𝑠 +

𝛽5𝑇𝑜𝑝10𝐿𝑎𝑤𝑦𝑒𝑟 + 𝛽6𝐷𝑒𝑏𝑡 + 𝛽7𝑆𝑖𝑧𝑒 + 𝛽8𝐿𝑜𝑠𝑠 + 𝛽9𝐿𝑛𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 + 𝜑𝑇 + 𝜀 (1)

The benefits of using OLS include ease of interpretation and the ability to include

categorical variables that can bias inferences when researchers use maximum likelihood

estimation (Greene, 2004). Because our dependent variable is censored at zero and one, we

additionally employ a Tobit. In addition, we control for firm leverage, size, profitability, and the

13

proceeds from the IPO sale, include year-quarter fixed effects, and winsorize our non-binary

variables at the top and bottom one percent.

Our first dependent variable is Trust, which is the percent of CEOs’ shares that are placed

in a trust prior to the IPO. We also examine the results of our determinants model with the

percent of CEOs’ shares placed in tax-advantaged trusts (TA Trust) and non-tax-advantaged

trusts (NTA Trust) as dependent variables. A rational CEO will place shares into the trust only if

the benefits exceed the costs. We motivate several likely determinants of trust usage, based on

the premise that trust usage should be increasing in the tax benefits of establishing a trust.

There are at least two reasons why the tax benefits of estate planning are likely more

salient for older CEOs (LnAge). First, the uncertainty of the value of assets in executives’ future

estate declines as the individual ages, which can provide a more accurate assessment of the net

benefits of estate planning. Second, older individuals are typically more risk averse (e.g., Barker

and Mueller, 2002; Yim, 2013; Serfling, 2014). Transferring shares to a tax-advantaged trust can

generate an immediate tax liability, but mitigates the possibility of higher estate tax liabilities

being owed by descendants in the future.

Founder CEOs (Founder) are also likely to reap larger tax benefits from trusts than other

CEOs. Founders’ long standing with the firm makes their tax basis lower on average. Because

capital gains taxes are applied on the difference between the sale price of stock and the cash paid

to acquire the stock, founders face substantial capital gains taxes when selling equity under

normal circumstances. A tax-advantaged trust can allow a CEO to avoid capital gains (and

possibly gift) taxes entirely, depending on the executive’s tax exemptions and the trust’s

structure. Finally, we expect trust share transfers to be an increasing function of the CEOs’

wealth (LnEquityWealth), because estate taxes only apply when the value of an estate exceeds

14

certain thresholds and inter vivos gifts are more likely as a household’s net worth increases

(McGarry, 2013; Poterba, 2001).

Our most direct measure of the personal tax benefits of trust use is the combined federal

and state estate tax rates (Estate Tax). CEOs that expect to incur higher estate tax rates have a

greater incentive to place their ownership in a tax-advantaged trust, and thus we expect a positive

relation between tax-advantaged trust holdings and Estate Tax.

Finally, to examine whether top law firms are associated with the creation of tax-

advantaged trusts, we include Top 10 Lawyer. Prior work finds higher deal completion (offer

withdrawal) rates when the bidding (target) firm retains a top law firm, which is consistent with

top law firms providing superior legal advice (Krishnan and Masulis, 2013). Insofar as top law

firms provide their clients with superior legal advice, we expect top law firms will have greater

incentives and ability to provide tax-advantaged trust compliance and planning services with a

firm’s CEO during the IPO process.

4.2 Results for Economic Determinants of Trust Usage

Table 3 displays the results from regressing overall trust usage on CEO and firm

characteristics (column 1). For ease of interpretation, we focus our discussion on the OLS

models, which are qualitatively similar to our Tobit analysis. Consistent with our predictions,

when estate taxes are more salient, the executive transfers more private IPO shares into trusts.

Both the executive’s age (coeff. = 0.121, p-value < 0.01) and equity wealth (coeff. = 0.299, p-

value < 0.01) are positive and statistically significant. Economically, a 10 percent increase in

pre-IPO equity wealth results in 3 percent more of the executive’s shares being transferred into a

trust. When CEOs are founding members of the issuing firm they transfer 3.5 percent more

shares into trusts than non-founding members (coeff. = 0.035, p-value < 0.01). We also find

15

support for our predictions that trust utilization is increasing in applicable estate taxes (coeff. =

0.095, p-value < 0.05). In terms of economic significance, a standard deviation increase in estate

taxes (approximately an 11 percent increase) results in a 1.1 percent higher proportion of shares

CEOs transfer into a trust.

We also explore the how firm characteristics prior to the IPO influence the CEO decision

to transfer share ownership into trust entities. We find in column 1 that CEOs managing firms

with less leverage (coeff. = -0.040, p-value < 0.01) are more likely to transfer their shares into

trusts prior to going public. One possible explanation for this result is that leverage constrains a

CEO’s ability to take advantage of investment opportunities, which makes them less willing to

place shares into pre-IPO trusts (Lang, Ofek, and Stulz, 1996). Interestingly, CEO trust use is not

significantly related to firm size (t-stat = 0.660), operating at a loss (t-stat = 0.612), or IPO

proceeds (t-stat = -1.540). Interestingly, the only other firm characteristic that relates to trust

establishment is having a top law firm (coeff. = 0.057, p-value < 0.01). Assuming that certain

CEOs underutilize trusts, perhaps those individuals who are subject to informational constraints,

this result is consistent with top law firms providing superior legal advice (Krishnan and

Masulis, 2013).

In columns (3) through (6) of Table 3, we explore how our personal tax incentives and

firm characteristics influence the propensity to transfer shares to tax-advantaged trusts and non-

tax-advantaged trusts. As a validation of our trust classification procedure, the associations

between personal tax preferences appears concentrated in our tax-advantaged trusts (TA Trust) in

columns (5) and (6) and the inferences are statistically and economically similar to overall trust

usage. Out of our five hypothesized predictions on personal trust planning, only one coefficient

loads in the predicted direction for the non-tax-advantaged trusts (NTA Trust) in columns (3) and

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(4). These results should be interpreted cautiously, however, given the small number of CEOs

using non-tax-advantaged trusts.

In sum, our results suggest that managers appear to use tax-advantaged trusts prior to an

IPO when the tax-related incentives to doing so are the greatest. Given the results herein, we use

TA Trust in our remaining tests to examine how personal tax strategies associate with CEOs’

private information and corporate-level tax strategies.

5. Trusts and Private Information

Different strands of literature generate opposite predictions regarding the extent to which

CEOs are likely to have private information prior to an IPO. On the one hand, there is a large

literature establishing that managers possess private information in certain settings and that they

use this private information when making both corporate and personal finance decisions. For

example, Bartov and Mohanram (2004) find that executives exercise more options prior to

periods of poor performance, and Dittmar and Field (2015) find that managers successfully time

their share repurchases. On the other hand, there are reasons to suspect that this informational

advantage may not extend to the IPO setting. Many features of the underwriting process are

designed to mitigate exactly the type of informational asymmetries that lead to management

having private information. The typical IPO process involves months of underwriter due

diligence and an extensive marketing roadshow. Underwriters certify the offering with their

reputation (e.g., Campbell and Kracaw, 1980), and significantly underprice the offering, which

Chemmanur (1993) argues incentivizes investors to acquire firm-specific information.

Answering this empirical question of the extent to which CEOs have private information

at the time of the IPO is difficult. One reason for this difficulty is that the observable pre-IPO

17

trading behavior of CEOs is difficult to interpret. Ang and Brau (2003) find that CEOs take steps

to conceal their pre-IPO sales in order to avoid sending a negative signal to investors.

CEOs’ use of pre-IPO trusts offers a cleaner setting to investigate this question. The

establishment of a tax-advantaged trust is a costly personal finance decision that CEOs benefit

more from when they expect future stock performance to be favorable. Holding tax rates

constant, the tax benefits of a tax-advantaged trust are maximized when the fair market value of

their shares is lower now than it will be in the future. If CEOs understand this and have accurate

private information about the firm’s future performance, then they will transfer more shares into

a trust when they believe their firm to be undervalued, leading to a positive relation between trust

usage and future abnormal returns.

In Tables 4 through 7, we examine whether tax-advantaged trusts predict post-IPO

returns to corroborate whether managers have some information on post-IPO value that is not

incorporated in the IPO offer price. Table 4 presents descriptive statistics on the average post-

IPO returns in the first, second, and third years following the IPO, partitioned by whether the

CEO places shares in a tax-advantaged trust. The first row of Table 4 shows that the first year

post-IPO returns, beginning at the IPO offer price, are 16 percent higher for firms with CEOs

using tax-advantaged trusts, compared to other firms, and that this difference in means is

significant at the 5 percent level. The second row in Table 4 shows that the relation continues to

be statistically significant at the 10 percent level after removing IPO underpricing from the first

year returns. The positive relation between trust usage and higher average returns is consistent

with either CEOs having private information regarding expected abnormal stock returns or with

CEOs using trusts more when risk is high. The lack of a consistent significant relation between

18

tax-advantaged trust usage and the second and third year returns is more consistent with CEOs

having private information (rather than a risk-based phenomenon).

To further examine the plausibility of CEO private information as a driver of the positive

association between trust usage and returns, we investigate whether the positive association

persists using risk-adjusted abnormal returns. To accomplish this, we follow the large post-IPO

performance literature, which begins with Ritter (1991), and compute post-IPO returns relative to

a matched firm that is already public. Specifically, as in Brau, Couch, and Sutton (2012) and

Lyon, Barber, and Tsai (1999), we compute post-IPO returns as the difference between an IPO

issuer’s returns and the returns to a matched firm that has been public for at least 5 years, has

market capitalization within 30 percent of the IPO firm, and has the most similar book-to-market

ratio as of the first post-IPO quarterly filing. If a control firm delists, we splice in the second best

match as of the original match date.

The first row in Panel B of Table 4 shows that the positive relation between tax-

advantaged trust usage and first year returns is robust to using a risk-adjusted measure of returns.

The average trust firm outperforms its matched counterpart by 22 percentage points in the first

year, which is 17 percentage points more than the average non-trust firm. This difference is

statistically significant at the 1 percent level and is qualitatively similar when measuring median,

instead of mean, returns or when excluding IPO underpricing from the first year returns. In this

descriptive analysis, these differential abnormal return patterns continue into the second year

following the IPO, but dissipate thereafter.

One challenge in computing post-IPO abnormal returns is handling IPO issuers that leave

the sample. The statistics in Table 4 require a firm to exist in CRSP until the end of a given year

to be included in the statistic. This is not too important for one year returns as only 41 of 1,611

19

firms do not have CRSP returns at the end of the first year. However, longer-run returns are

subject to more selection bias. Figure 2 descriptively investigates the relation between trusts and

post-IPO returns using a different method. Here, we include all IPO issuers through the end of

the third year. If an IPO issuer leaves the sample for any reason, we assume that the issuer earned

zero abnormal returns for the remainder of three years.7 The line in Figure 2 plots the difference

between the median performing trust issuer (in terms of abnormal stock returns) and the median

performing non-trust issuer. Figure 2 suggests that virtually all of the outperformance for the

typical trust issuer occurs in the first year. During the first year trust issuers outperform non-trust

issuers by 20%, and over the next two years the two groups experience similar abnormal returns.

In Table 5, we investigate whether this relation between trusts and post-IPO returns can

be explained by other observable differences between firms that have CEOs with tax-advantaged

trusts and those that do not. To this end, we regress post-IPO returns on the percentage of

personal shares a CEO places into a tax-advantaged trust along with all of the firm- and CEO-

level control variables used in Table 3. The positive and statistically significant coefficient

estimate on TA Trust indicates that trusts provide information about future abnormal returns.

Taken together, columns 1 and 2 suggest that this information is incremental to and not highly

correlated with other CEO characteristics sources. Adding control variables has little effect on

the coefficient on TA Trust. In both columns the coefficient on TA Trust of between 0.19 and

0.22 indicates that a one standard deviation (or 0.213 unit) increase in the TA Trust variable is

associated with a four to five percent increase in first year post-IPO returns. In columns (3) and

(4) of Table 5, we find that the results are qualitatively similar with or without including

underpricing in our measure of post-IPO abnormal returns.

7 In unreported tests, we find similar sample attrition rates between our trust sample and non-trust sample.

20

In Table 6, we examine whether CEOs’ private information persists in the second and

third year following the IPO for our sample. Across the four columns of Table 6, only one

coefficient is positive and statistically significant, providing further support to our conjecture that

the abnormal returns we observe are more consistent with private information, rather than a risk-

based result.

The results thus far are consistent with CEOs having private information at the time of

the IPO and that the market does not fully integrate this information into prices for some time,

presumably because market participants do not fully understand the signaling value of trust

establishment.8 We now turn to the natural question of which CEOs actually possess

information that the market does not immediately incorporate into the IPO price. Specifically, we

investigate whether this outcome is more likely for informationally sensitive firms.

Table 7 presents a series of regressions in which we regress first year abnormal returns on

the percentage of shares that a CEO places into a trust and its interaction with several proxies for

informational sensitivity, including firm size, age, profitability, and R&D intensity. Columns 1

through 4 indicate that the positive relation between trust usage and future returns is concentrated

in non-profitable, young, and R&D intensive firms. In Columns 5 and 6 we run a multiple

regression and find that the profitability result becomes insignificant after controlling for the age

and R&D intensity interactions. Taken together, these findings are consistent with CEOs

possessing private information that is not incorporated into the IPO price, only for young, R&D

intensive firms.

8 These results contrast with Edwards, Hutchens, and Rego (2016), who find that supercharging an IPO (an IPO

structure which generates future tax deductions for shareholders) is fully incorporated into the IPO price for 49

issuers and does not generate statistically significantly different future abnormal returns versus non-supercharged

IPOs.

21

Overall, the evidence is consistent with CEOs having some private information about

future stock performance, when informational asymmetry is high, and rationally increasing their

trust usage when this information is positive. Our evidence also suggests that executives

rationally consider personal tax strategies during the IPO process. This finding complements

existing literature that suggests there are costs to CEOs selling their shares at the IPO (Ang and

Brau, 2003; Brau and Fawcett, 2006).

6. Trusts and Corporate Tax Behavior

Given that CEOs appear to be acting rationally by establishing trusts to minimize future

individual income taxes, our setting is well suited to identifying how individual tax preferences

spill over into corporate tax behavior. The prior literature suggests that there is an association

between managers’ private and corporate decision making (e.g., Bartov and Mohanram, 2004;

Jenter, 2005), but given the paucity of individual-level data (beyond externally assigned

compensation) these associations have been difficult to demonstrate empirically. Here, we use

CEOs’ decisions to transfer shares into trusts as a proxy for their personal tax avoidance

preferences to provide new evidence on whether CEOs’ personal tax preferences relate to future

corporate tax strategy. Specifically, we conduct the following regression:

𝐶𝑜𝑟𝑝𝑜𝑟𝑎𝑡𝑒 𝑇𝑎𝑥 𝑂𝑢𝑡𝑐𝑜𝑚𝑒 = 𝛽0 + 𝛽1𝑇𝐴 𝑇𝑟𝑢𝑠𝑡 + 𝛽2𝐿𝑛𝐴𝑔𝑒 + 𝛽3𝐹𝑜𝑢𝑛𝑑𝑒𝑟 +

𝛽4𝐿𝑛𝐸𝑞𝑢𝑖𝑡𝑦𝑊𝑒𝑎𝑙𝑡ℎ + 𝛽5𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥𝑒𝑠 + 𝛽6𝑇𝑜𝑝 10 𝐿𝑎𝑤𝑦𝑒𝑟 + 𝛽7𝑃𝑃𝐸 + 𝛽8𝑅𝐷 +

𝛽9𝑁𝑂𝐿 + 𝛽10𝑀𝑢𝑙𝑡𝑖 + 𝛽11𝐷𝑒𝑏𝑡 + 𝛽12𝑆𝑖𝑧𝑒 + 𝛽13𝐿𝑛𝑃𝑟𝑜𝑐𝑒𝑒𝑑𝑠 + 𝜑𝑇 + 𝜀. (2)

The independent variable of interest is TA Trust. In our empirical design, we conduct

regressions including our full slate of control variables for all observable determinants for

establishing a trust (e.g., CEO age, wealth, shareholding, etc.) and corporate tax-related controls

from the prior literature. A potential concern with this empirical design is that by controlling for

22

determinants of trust use, we are only measuring abnormal or unobservable trust use, rather than

actual trust use. Therefore, in Tables 8 and 9, we report additional results that exclude the

determinants of trust usage and other control variables from the regression. Similar to our

determinants regression, we control for year-quarter fixed effects.

6.1 Trusts and corporate tax strategy

Behavioral consistency theory predicts that the individual preferences of executives will

influence their behavior in implementing corporate strategies (e.g., Cronqvist, Makhija, and

Yonker, 2012). This could result in a positive association between personal and corporate tax

avoidance strategies. Alternatively, Dyreng, Hoopes, and Wilde (2016) suggest that public

scrutiny of tax positions may reduce a firm’s propensity to engage in tax avoidance. Insofar as

media scrutiny of CEO trust use (e.g., Mider 2013) leads to increased regulatory scrutiny of a

firm’s tax avoidance, CEO trust use may be negatively related to corporate tax avoidance. This

idea is consistent with the Chen, Chen, Cheng, and Shevlin (2010) finding that family firms are

less tax aggressive than non-family firms because family firms view their firms as legacies to

pass on to future generations and as such are concerned about IRS audits of aggressive corporate

tax positions. Thus, the relation between personal and corporate tax avoidance strategies is an

empirical question.

One reason that there is limited evidence on whether executives’ personal tax preferences

carry over to their firm’s corporate tax policy is a lack of data on executives’ tax decisions. Most

existing proxies for executive tax behavior are based on incentives generated by a CEO’s

compensation scheme (Desai and Dharmapala, 2006; Rego and Wilson, 2012; Gaertner, 2014;

Armstrong, Blouin, Jagolinzer, and Larcker, 2015) or a firm’s ownership structure (Chen, Chen,

Cheng, and Shevlin, 2010; Badertscher, Katz, and Rego, 2013; McGuire, Wang, and Wilson,

23

2014), both of which are influenced by the board of directors. For example, the only existing

evidence of a link between personal and corporate tax strategy must be inferred from evidence in

Chyz (2013), who finds that there is a positive relation between illegally backdating stock option

exercises and the propensity for firms to engage in tax avoidance. However, it is unclear

whether backdating option exercises are fundamental preferences of the executive, or rather a

consequence of the corporate governance system dictated by the firm (Armstrong and Larcker,

2009; Biggerstaff, Cicero, and Puckett, 2015).

The evidence in Table 3 suggests that trust ownership proxies for individual tax

preferences, and is largely unrelated to firm characteristics. In addition, tax-advantaged trust

usage is distinct from other commonly deployed proxies in the literature since the decision to

transfer shares into a trust reflects a legal, conscious choice made by the CEO. Thus, our setting

provides a unique perspective on how individual tax preferences relate to corporate tax

outcomes. If personal tax preferences spill over into corporate tax strategy, TA Trust will be

positively associated with corporate tax avoidance.

To test our empirical predictions on the association between TA Trust and corporate tax

strategy, we use five common proxies for corporate tax strategy as dependent variables in

equation (2): the long-run GAAP effective tax rate, the long-run cash effective tax rate, long-run

cash taxes paid relative to the statutory rate, volatility of the cash effective tax rate (σCETR), and

unrecognized tax benefits scaled by assets (UTB). We measure the long-run GAAP effective tax

rate (LR ETR) as the sum of the issuer’s income tax provision scaled by the sum of the issuer’s

pre-tax income in the three most recent years after going public. We use LR ETR as a measure of

tax avoidance, because it is a direct measurement of the tax rate on pre-tax GAAP earnings. The

long-run cash effective tax rate (LR CETR) is our second measure of tax avoidance. Following

24

Dyreng, Hanlon, and Maydew (2008), we measure long-run cash tax avoidance as the sum of

three years of tax expense cash taxes paid over the sum of three years of pre-tax income minus

special items. The maximum LR ETR (LR CETR) is set to 1 and is missing when the denominator

is negative.

Our LR ETR and LR CETR measures are widely used in the literature, but both measures

are unavailable for loss firms, and losses are common for IPO firms. To address this

shortcoming, we use three additional measures of tax avoidance. Following Henry and Sansing

(2014), we measure LR CTP as the sum of the issuer’s cash paid for income taxes less the

statutory rate times the difference between pretax income and special items for the three most

recent years after going public scaled by the sum of the market value of assets in the three most

recent years after going public. In contrast to LR ETR and LR CETR, the LR CTP measure

utilizes all firms in our sample with non-missing cash taxes paid, rather than firms with positive

pre-tax income.

Next, we measure σCETR as the standard deviation of the issuer’s cash income taxes paid

(CETR)9 scaled by the sum of the issuer’s pre-tax income less special items for the three most

recent years after going public. Prior literature uses σCETR to measure tax risk, which relates to

the dispersion in tax outcomes (Guenther, Matsunaga, and Williams, 2016). Prior research finds

greater tax avoidance is positively associated with tax risk, consistent with uncertain and risky

tax positions being associated with a greater dispersion in realized tax outcomes (Neuman,

Omer, and Schmidt, 2013).

Finally, we use unrecognized tax benefits (UTB) following the IPO to examine tax

avoidance activities. To measure LR UTB, we take the issuer’s average unrecognized tax benefits

9 To be included in this analysis, the CETR for each year must be non-missing.

25

scaled by total assets from the three most recent years after going public. Lisowsky (2010)

reports the propensity to have a tax shelter is positively related to the contingent tax liability. If

CEOs’ individual tax preferences complement their firm’s corporate tax strategy, we expect that

TA Trust will be negatively associated with ETR, CETR and CTP, but positively associated with

σCETR and LR UTB. If there is a substitution effect between trust establishment and corporate

strategies, we would expect opposite results. We test our empirical predictions on the association

between individual tax preferences and corporate tax outcomes in Table 8.

We find evidence of a positive association between a CEOs’ preferences to avoid

personal taxes and their long-term corporate tax strategies. In column (2) of Table 8, we find

that TA Trust is significantly negatively associated with LR ETR (coeff. = -0.094, p-value <

0.05). A one standard deviation increase in TA Trust results in a 2 percentage point decrease in

LR ETR. Inconsistent with CEO personal tax avoidance spilling into corporate tax avoidance, the

coefficient estimate on TA Trust is not statistically significant in columns (3) and (4). In columns

(5) and (6), we find tax-advantaged trusts are associated with significantly lower LR CTP. A one

standard deviation increase in TA Trust results in a 0.5 percentage point decrease in the LR CTP.

Given the mean value for LR CTP is 0.034 for our sample, the effect we document is equal to an

economically significant fifteen percent change relative to the mean LR CTP. We find consistent

evidence of a positive relation between CEO personal tax avoidance and corporate tax avoidance

in columns (7), (8), and (10) of Table 8. In column (8), we find trust use is associated with

significantly higher σCETR (p-value < 0.05). Finally, in column (10), we find evidence

consistent with a positive relation between CEO tax preferences and corporate tax avoidance

when measuring tax avoidance using LR UTB (p-value < 0.05). A one standard deviation

increase in TA Trust is associated with a 13 basis point higher LR UTB, which represents an

26

economically significant 14 percent of the mean LR UTB of 90 basis points for our sample. Our

collective results suggest that personal tax preferences revealed at a firms’ IPO are associated

with their future corporate tax strategies. Specifically, CEOs that use trusts to manage their

personal finances are also more aggressive in minimizing their corporate tax bill.

6.2 Trusts and tax haven usage

In our final analysis, we examine the relation between CEO tax preferences and

subsidiary locations in tax haven jurisdictions. In doing so, we provide evidence on a mechanism

through which trust CEOs more aggressively reduce their corporate taxes and examine whether

CEO trust establishment is associated with complex tax-based operating decisions. To

empirically test the association between trust usage and corporate tax haven use, we use two

proxies for haven usage: the number of subsidiaries which reside in countries reported as tax

havens (Haven Subs) and, using a Probit, an indicator variable equal to one if a firm has a

subsidiary in a dot tax haven jurisdiction (DOT).10

We follow Dyreng and Lindsey (2009) by

using subsidiary data from Exhibit 21 disclosures and considering jurisdictions tax havens if they

appear on at least three of four publically-available tax haven lists. In contrast to other havens,

DOT haven jurisdictions are exceptionally small countries, such as the Cayman Islands, in which

the primary benefit of locating a subsidiary there likely stems from tax savings, rather than other

business purposes.

In Table 9, we find a positive relation between a CEO’s preference to avoid personal

taxes and tax haven usage. In column (2) we find a significantly positive relation between TA

Trust and Haven Subs (coeff. = 0.215, p-value < 0.05)– a one standard deviation increase in trust

10

Refer to Table 1 for the countries identified as tax havens or as dot havens. We classify dot havens following

Hines and Rice (1994) and Desai, Foley, and Hines (2006).

27

holdings leads to an approximate eight percent increase in the number of tax havens.11

Finally,

consistent with CEO tax preferences being associated with more aggressive tax avoidance

strategies at the firm, column (4) shows that there is a positive and statistically significant

relation (p-value < 0.05) between TA Trust and DOT. Our results are similar whether or not we

use our full models in columns (2) and (4) or limited models in columns (1) and (3). Overall,

these results suggest managers symmetrically utilize separate legally-recognized entities, such as

trusts and foreign dot tax havens, in their private and public lives as mechanisms to avoid

taxation.

7. Conclusion

The wealth and liquidity created during the IPO process forces executives to make some

of the most important financial decisions of their life. One such personal finance decision is

whether or not to place their equity into a trust prior to an IPO. Doing so can reduce taxes, but

involves fees and can reduce an executive’s direct ownership of the firm. Using a hand-collected

sample, we provide the first evidence that CEOs actively use trusts when incentives to avoid

taxes are the highest. This finding highlights the first-order effect of taxes on CEO behavior, and

sheds new light on how CEOs can utilize tax planning to avoid capital gains taxes from highly

appreciated shares. More importantly, we exploit this setting to provide new evidence on two

unsettled empirical questions.

The first is whether or not CEOs have private information regarding future performance

at the time of the IPO. Trust usage sheds light on this issue because trusts only generate net tax

savings to the extent that the assets placed into a tax-advantaged trust appreciate in value. If

CEOs have private information regarding future performance then rational CEOs will be more

11

Our results are qualitatively similar if we use the number of tax haven countries instead of tax haven subsidiaries.

28

likely to place undervalued assets into a trust, resulting in a positive relation between trust usage

and future returns. We find evidence of exactly this, as IPOs with CEOs using trusts outperform

other IPO issuers by 10 to 17 percent in the first year. This outperformance is concentrated in

informationally deficient firms, such as those that are young and R&D intensive. Thus, CEOs

appear to have private information that is incremental to what can be conveyed through the

extensive due diligence and investor scrutiny that occurs during the IPO process.

The second question we address is whether CEOs’ preference to avoid personal taxes is

related to their aggressiveness in avoiding corporate taxes. Existing literature provides some

evidence on the topic, but is limited due to the rarity with which researchers observe the personal

tax decisions of CEOs. Trusts fill this void, as they represent an economically meaningful

decision that is a legal and conscious effort to reduce personal taxes. Our results are consistent

with CEOs possessing personal tax preferences, and those preferences spilling into corporate

strategy. Trust usage is associated with a wide range of measures designed to capture corporate

tax avoidance, such as lower long-run GAAP effective tax rates, lower long-run cash taxes paid

relative to the statutory rate, and more unrecognized tax benefits. In addition, CEO trust usage is

positively related to corporate tax haven subsidiaries, and dot tax havens, suggesting that

managers incorporate separate legal entities in both their private and public affairs in an effort to

mitigate taxes. Taken together, the evidence in this paper suggests that there is previously

unrecognized information content in the personal finance decisions of executives. More

importantly, these decisions contain value relevant information and are related to how CEOs

manage their firm.

29

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32

Appendix A

Example of Hand Collection from IPO Prospectus

This appendix provides excerpts from the beneficial ownership table of Greenlight Capital Re,

Ltd., or Greenlight Re, prospectus filed on May 24, 2007. The CEO and his related trust entity

are bolded for expositional purposes. For brevity, we have omitted certain extraneous detail

from the prospectus not relevant to our variables of interest.

Name and address of beneficial owner Beneficial ownership of

principal shareholders prior to

the offering and the concurrent

private placement

Number %

David Einhorn (2) 3,623,370 16.73%

Keren Ohr Lanoar “B” (3) 1,500,000 6.92%

Montpellier International Ltd. (4) 2,000,000 9.23%

Scoggin International Fund, Ltd. (5) 1,100,000 5.08%

Seneca Capital International Ltd. (6) 1,250,000 5.77%

United Congregation Mesorah (7) 1,500,000 6.92%

Tim Courtis (8) 94,065 *

Leonard Goldberg (9) 283,667 1.30%

Barton Hedges (10) 147,633 *

Alan Brooks (11) 61,667 *

Frank D. Lackner (12) 68,667 *

Joseph Platt (13) 75,667 *

Daniel Roitman (14) 145,670 *

Jerome Simon — *

All directors and Named Executive Officers as a group (9 persons) 4,500,406 20.77%

* Represents less than 1% of the outstanding Ordinary Shares.

(2) Prior to this offering, David Einhorn owns 3,623,370 Class B Ordinary Shares…On April 20,

2007, David Einhorn transferred all of his 3,623,370 shares to the David M. Einhorn 2007

GRAT for which he retains beneficial ownership.

33

Figure 1

Proportion of CEOs with shares owned by a trust prior to public issuance

This figure presents the time series average of the percentage of CEOs that transferred a

proportion of their shares into a trust entity prior to their firm going public. The sample spans

from 1997 through 2013 and includes all hand-collected observations from the prospectuses.

The solid (dashed) line represents the proportion of CEOs transferring shares into (non-) tax-

advantaged trusts.

34

Figure 2

Abnormal Performance of Trust Ownership Firms vs. Non-Trust Ownership Firms

This figure plots the difference between the post-IPO abnormal returns of the median performing

IPO issuer whose CEOs use a trust and the median performing IPO issuer whose CEO does not

use a trust. In each case, the median performing IPO issuer is defined using abnormal returns.

Abnormal are computed for each IPO issuer as the monthly compounded buy-and-hold returns

minus similar returns for a size and book-to-market matched firm. A matched firm is the firm

with the most similar book-to-market ratio as the issuer out of the set of firms that have been

public for five years and have a market capitalization of no less than 70% and no more than

130% of the IPO issuers’ market capitalization. If matched firms leave the sample, then the

returns of the next closest match (as of the original match date) are spliced in going forward. If

an IPO issuer leaves the sample, then abnormal returns are assumed to be zero for the remainder

of three years.

35

Table 1

Data Definitions

Variable Name Variable Definition (source in parentheses)

Trust The percent of CEOs’ shares that are owned by a trust in the issuing firm’s most recent

prospectus prior to going public (IPO Prospectus).

TrustD An indicator variable equal to 1 if the CEO transferred shares into a trust prior to going

public, and zero otherwise (IPO Prospectus).

NTA Trust The percent of CEOs’ shares that are owned by revocable (non-tax-advantaged) trust in

the issuing firm’s most recent prospectus prior to going public (IPO Prospectus). We

define non-tax-advantaged trusts as those trusts specifically titled as ‘Revocable Trusts’,

‘Living Trusts’, ‘Marital Trusts’, and ‘Community Property Trusts’ (IPO Prospectus).

NTA TrustD An indicator variable equal to 1 if NTA Trust > 0, and zero otherwise (IPO Prospectus).

TA Trust The percent of CEOs’ shares that are owned by a trust not classified as revocable in the

issuing firm’s most recent prospectus prior to going public (IPO Prospectus).

TA TrustD An indicator variable equal to 1 if TA Trust > 0, and zero otherwise (IPO Prospectus).

LnAge The natural log of the age of the CEO in the issuing firm’s most recent prospectus prior

to going public (IPO Prospectus).

Founder An indicator variable equal to 1 if the CEO was documented as a founding member of

the issuing firm in the issuing firm’s most recent prospectus prior to going public, and

zero otherwise (IPO Prospectus).

LnEquityWealth This is an empirical proxy for CEO wealth. We measure CEO wealth as the natural log

of 1 plus the inflation-adjusted value of the CEOs’ pre-IPO shares × IPO offer price (IPO

Prospectus, SDC).

Estate Tax The Federal and State combined estate tax rate in place for the year of the IPO issuance.

The issuer’s state is determined based on the issuing firm’s headquarters. If CEO Equity

Wealth (unadjusted for inflation and log transformation) is below the Federal Exclusion,

the Federal portion of the estate tax is set to zero. The Federal Exclusion is the minimum

estate size for which individuals will owe estate taxes (Wolters Kluwer).

Top 10 Lawyer Indicator equal to one when the IPO firm retains a law firm that was in the top 10 law

firms by total IPO proceeds in the prior year, and zero otherwise (SDC).

PPE The issuers’ property, plant, and equipment net of depreciation scaled by total assets in

the most recent year prior to going public (Compustat).

Debt The issuers’ long-term debt and portion of long term debt in current liabilities scaled by

total assets in the most recent year prior to going public (Compustat).

Size The natural log of the issuers’ inflation-adjusted total assets in the most recent year prior

to going public (Compustat).

Loss An indicator variable equal to 1 if ROA is negative (Compustat), and zero otherwise.

LnProceeds The natural log of the issuers’ inflation-adjusted IPO proceeds in the most recent year

prior to going public (SDC).

Multi An indicator variable equal to 1 if the issuing firm discloses non-US geographical

segments from their first annual report following the IPO, and zero otherwise

(Compustat Segment).

NOL The issuers’ net operating losses scaled by total assets in the most recent year prior to

going public (Compustat).

36

Variable Name Variable Definition (source in parentheses)

RD The issuers’ research and development scaled by total assets in the most recent year prior

to going public (Compustat).

Total Count The natural log of one plus the total number of countries in which the firm reported a

material operation in Exhibit 21 from their first 10-K following the IPO (Scott Dyreng’s

website).

Total Subs The natural log of one plus the total number of material subsidiaries in Exhibit 21 from

their first 10-K following the IPO (Scott Dyreng’s website).

Year 1 Returns The daily compounded holding period returns from the IPO offer price to the price at the

close of the 250th day of trading (CRSP).

Year 1 Returns

(w/o UP)

Equals the Year 1 returns, excluding the returns from the offer price through the end of the

first day of trading (CRSP).

Year 2 (3) Returns The daily compounded holding period returns from the close of the 250th (500

th) day of

trading through the close of the 500th

(750th) day of trading (CRSP).

Year t Abnormal

Returns

Year t returns minus the returns to a size and book-to-market matched firm over the same

period. Matched firms are the firm with the closest book-to-market ratio in the first quarter

after the IPO that has been public for at least five years and has a market capitalization that is

at least 70% and at most 130% of the IPO firm’s market capitalization. If matched firms

leave the sample, then the returns from the next best match as of the original date are spliced

in to compute future returns.

Haven Subs The natural log 1 plus the total number of material subsidiaries operating in tax haven

countries in Exhibit 21 from their first 10-K following the IPO (Scott Dyreng’s website).

DOT An indicator variable equal to 1 (0) if the firm reports (does not report) a material

subsidiary in Exhibit 21 from their first 10-K following the IPO operating in any of the

following countries: Andorra, Anguilla, Antigua and Barbuda, Bahamas, Aruba,

Bahrain, Barbados, Belize, Bermuda, Cayman Islands, Cook Islands, Costa Rica, Cyprus,

Dominica, Gibraltar, Guernsey, Grenada, Isle of Man, Jersey, Kiribati, Liechtenstein,

Luxembourg, Macau, Malta, Martinique, Mauritius, Mauru, Nauru, Netherlands Antilles,

Niue, Saint Lucia, Saint Kitts and Nevis, Saint Vincent and the Grenadines, Turks and

Caicos Islands, and Vanuatu (Scott Dyreng’s website).

LR ETR Total GAAP tax expense per dollar of pre-tax income in the three most recent years after

going public. The maximum LR ETR is set to 1 and missing when the denominator is

negative (Compustat).

LR CETR The sum of the issuers’ cash taxes paid scaled by the sum of the issuers’ pre-tax income

less special items in the three most recent years after going public. The maximum LR

CETR is set to 1 and missing when the denominator is negative (Compustat).

LR CTP Following Henry and Sansing (2014), the sum of the issuers’ cash income taxes paid less

the statutory rate × (PI – SPI) for the three most recent years after going public scaled by

the sum of the market value of assets in the three most recent years after going public.

For expositional purposes, we multiply the fraction by 100 (Compustat).

σCETR The standard deviation of the issuers’ cash income taxes paid scaled by the sum of the

issuers’ pre-tax income less special items for the three most recent years after going

public. The maximum CETR for each year is set to 1 and missing when aggregate pre-

tax income less special items is negative. To be included in the sample, the CETR for

each year must be non-missing (Compustat).

LR UTB The issuers’ average unrecognized tax benefits scaled by total assets from the three most

recent years after going public (Compustat).

37

Table 2

Descriptive Statistics

This table provides the descriptive statistics for all the variables used in main empirical analysis. Variable

definitions are provided in Table 1.

Variable N Q1 Mean Median Q3 σ

Trust 1,611 0.000 0.098 0.000 0.007 0.244

TrustD 1,611 0.000 0.258 0.000 1.000 0.437

NTA Trust 1,611 0.000 0.021 0.000 0.000 0.122

NTA TrustD 1,611 0.000 0.038 0.000 0.000 0.192

TA Trust 1,611 0.000 0.077 0.000 0.000 0.213

TA TrustD 1,611 0.000 0.232 0.000 0.000 0.422

CEO Age (Raw) 1,611 42 48.438 48 54 8.607

LnAge 1,611 3.738 3.865 3.871 3.989 0.178

Founder 1,611 0.000 0.424 0.000 1.000 0.494

CEO Equity Wealth (Raw) in millions 1,611 5.760 50.947 15.872 42.116 111.824

Equity Wealth 1,611 0.005 0.047 0.015 0.04 0.123

PPE 1,611 0.070 0.216 0.136 0.285 0.211

Debt 1,611 0.036 0.335 0.214 0.515 0.395

Size 1,611 2.771 3.784 3.593 4.743 1.667

Loss 1,611 0.000 0.472 0.000 1.000 0.499

LnProceeds 1,611 3.715 4.22 4.177 4.701 0.853

RD 1,611 0.000 0.221 0.075 0.308 0.369

Multi 1,611 0.000 0.554 1.000 1.000 0.497

NOL 1,611 0.000 0.663 0.000 0.491 1.759

Estate Taxes 1,611 0.392 0.393 0.438 0.438 0.112

Top 10 Lawyer 1,611 0.000 0.143 0.000 0.000 0.347

Total Count 470 0.000 1.099 1.099 1.792 0.937

Total Subs 470 0.693 1.499 1.386 2.303 1.153

Haven Count 470 0.000 0.447 0.000 0.693 0.532

Haven Subs 470 0.000 0.585 0.000 1.099 0.741

DOT Haven 470 0.000 0.047 0.000 0.000 0.211

LR ETR 563 0.271 0.316 0.366 0.402 0.29

LR CETR 553 0.109 0.277 0.255 0.366 0.22

LR CTP 840 -0.004 0.034 0.000 0.013 0.151

σCETR 471 0.052 0.141 0.106 0.18 0.13

LR UTB 406 0.000 0.009 0.004 0.012 0.014

38

Table 3

Determinants of Trust Use

Trust is the percent of CEOs’ shares that are owned by a trust in the issuing firm’s most recent prospectus

prior to going public. NTA Trust is the percent of CEOs’ shares that are owned by a non-tax-advantaged

trust in the issuing firm’s most recent prospectus prior to going public. TA Trust is the percent of CEOs’

shares that are owned by a trust classified as a tax-advantaged trust in the issuing firm’s most recent

prospectus prior to going public. Independent variable definitions are provided in Table 1. Each model

includes year-quarter fixed effects and industry standard errors that are clustered by three-digit SIC

industries. ***, **, * signify statistical significance at the 1%, 5%, and 10% level, respectively.

(1) (2) (3) (4) (5) (6)

Dependent Variable Trust Trust NTA Trust NTA Trust TA Trust TA Trust

Model Type OLS Tobit OLS Tobit OLS Tobit

LnAge 0.121*** 0.359*** 0.024 1.009*** 0.098*** 0.261**

(3.407) (2.897) (1.201) (2.779) (3.126) (2.131)

Founder 0.035*** 0.196*** 0.009 0.208 0.027** 0.173***

(3.356) (4.889) (0.985) (1.070) (2.049) (4.020)

LnEquityWealth 0.299*** 0.756*** 0.065 0.825 0.229*** 0.600***

(4.686) (3.753) (1.195) (1.204) (4.313) (4.907)

Estate Taxes 0.095** 1.014*** 0.008 0.225 0.086** 1.014***

(2.017) (4.128) (0.297) (0.314) (2.154) (4.855)

Top 10 Lawyer 0.057*** 0.161*** 0.009 0.155 0.049** 0.149***

(2.986) (3.459) (1.385) (1.194) (2.388) (2.999)

Debt -0.040*** -0.226*** -0.007 -0.473*** -0.034*** -0.207***

(-3.607) (-3.085) (-1.452) (-3.606) (-3.870) (-3.200)

Size 0.004 -0.002 0.002 0.051 0.001 -0.011

(0.660) (-0.076) (1.039) (0.884) (0.250) (-0.500)

Loss 0.009 0.045 0.009 0.239* 0.000 0.003

(0.612) (0.897) (1.315) (1.723) (0.021) (0.058)

LnProceeds -0.014 -0.010 -0.007** -0.197** -0.007 0.014

(-1.540) (-0.305) (-1.997) (-2.042) (-0.686) (0.423)

Intercept -0.391*** -2.312*** -0.063 -4.723*** -0.333** -2.180***

(-2.835) (-3.984) (-0.822) (-2.698) (-2.557) (-3.392)

N 1,611 1,611 1,611 1,611 1,611 1,611

Adjusted (Pseudo) R2 0.049 (0.0839) 0.016 (0.166) 0.036 (0.0830)

39

Table 4

Post-IPO Returns Descriptive Statistics

This table presents unadjusted (Panel A) and risk-adjusted (Panel B) returns during the first three years following the IPO. Year 1 Returns equals the

holding period returns from the IPO offer price to the price at the close of the 250th day of trading, Year 1 Returns (w/o UP) excludes the returns from

the offer price through the end of the first day of trading, Year 2 Returns equals the holding period returns from the 251st through 500th days of

trading, and Year 3 Returns represents the holding period returns from the 501st through 750th days of trading. The corresponding abnormal returns

measures presented in Panel B are identical except that returns are benchmarked to a matched seasoned firm based on market capitalization and market

to book ratio. Specifically, within the set of firms that have been public for at least five years and have market capitalization within 30% of a given

IPO firm, we select the firm with the closest book-to-market ratio. Columns 1 and 2 present statistics for IPO issuers with CEOs using trusts, while

Columns 3 and 4 present the same statistics for firms whose CEOs do not use trusts. Columns 5 and 6 present the differences in mean and median

between the two groups. *, **, and *** represent t-statistics and Wilcoxon statistics representing statistically significant different means and medians

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

Panel A: Trust Use and Raw Returns

TA TrustD =1 TA TrustD= 0 Difference

(1) (2) (3) (4) (5) (6)

Mean Median Mean Median Mean Median

Year 1 Returns 0.47 0.16 0.31 0.08 0.16** 0.08**

Year 1 Returns (w/o UP) 0.11 -0.13 0.00 -0.17 0.10* 0.04

Year 2 Returns 0.08 -0.19 0.01 -0.21 0.06 0.02

Year 3 Returns 0.08 -0.08 0.11 -0.13 -0.04 0.05

Panel B: Trust Use and Abnormal Returns

TA TrustD =1 TA TrustD= 0 Difference

(1) (2) (3) (4) (5) (6)

Mean Median Mean Median Mean Median

Year 1 Abnormal Returns 0.22 -0.03 0.05 -0.19 0.17*** 0.16***

Year 1 Abnormal Returns (w/o UP) -0.15 -0.39 -0.25 -0.46 0.10* 0.07***

Year 2 Abnormal Returns -0.07 -0.36 -0.20 -0.44 0.13** 0.08**

Year 3 Abnormal Returns -0.14 -0.33 -0.15 -0.35 0.01 0.02

40

Table 5

Individual Trust Strategy and Post-IPO Abnormal Stock Returns

This table regresses risk-adjusted stock returns during the first year following the IPO on TA Trust,

measured as the percentage of CEO shares in a tax-advantaged trust. In Columns 1 and 2 the dependent

variable is Year 1 Abnormal Returns w/o UP, which equals the holding period returns from close of the

first day of trading to the close of the 250th day of trading relative to a matched firm. To obtain a matched

firm we take all firms that have been public for 5 years and have market capitalizations within 30% of the

IPO firm and then select the firm with the most similar book-to-market ratio. The dependent variables in

Columns 3 and 4 are identical except that they also include the first day’s returns (i.e., IPO underpricing).

Standard errors are clustered by three-digit SIC industries. T-statistics are presented below the

coefficients with *, **, and *** representing statistical significance at the 10%, 5%, and 1% levels,

respectively.

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

Year 1

Ab. Returns

w/o UP

Year 1

Ab. Returns

w/o UP

Year 1 Ab.

Returns

Year 1 Ab.

Returns

TA Trust 0.215***

(2.62)

0.192**

(2.32)

0.216**

(2.13)

0.173*

(1.73)

LnAge

-0.032

(-0.38)

-0.357***

(-4.17)

Founder

0.074

(1.59)

0.053

(1.15)

LnEquityWealth

-0.307

(-1.64)

0.286

(1.08)

Estate Taxes

-0.416**

(-2.43)

-0.033

(-0.14) Top 10 Lawyer

-0.010

(-0.20)

-0.007

(-0.13)

Debt

-0.037

(-1.19)

-0.205***

(-3.56)

Size

0.085***

(4.83)

-0.044*

(-1.88)

Loss

-0.059*

(-1.70)

0.011

(0.13)

LnProceeds

-0.052

(-1.58)

0.212***

(4.97)

N 1,570 1,570 1,570 1,570

Adjusted R2 0.003 0.032 0.002 0.039

41

Table 6

Individual Trust Strategy and Post-IPO Abnormal Stock Returns

This table regresses risk-adjusted stock returns during the first three years following the IPO on TA Trust,

measured as the percentage of CEO shares in a tax-advantaged trust. In Columns 1 and 2 (3 and 4) the

dependent variable is Year 2 (Year 3) Abnormal Returns, which equals the holding period returns from

close of the 251st (501

st) day of trading day to the close of the 500

th (750

th) day of trading relative to a

matched firm. To obtain a matched firm we take all firms that have been public for 5 years and have

market capitalizations within 30% of the IPO firm and then select the firm with the most similar book-to-

market ratio. Standard errors are clustered by three-digit SIC industries. T-statistics are presented below

the coefficients with *, **, and *** representing statistical significance at the 10%, 5%, and 1% levels,

respectively.

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

Year 2

Ab. Returns

Year 2

Ab. Returns

Year 3

Ab. Returns

Year 3

Ab. Returns

TA Trust 0.166*

(1.67)

0.141

(1.38)

0.067

(0.64)

0.046

(0.44)

LnAge

-0.056

(-0.55)

0.057

(0.54)

Founder

0.001

(0.04)

-0.055

(-1.08)

LnEquityWealth

0.080

(0.25)

-0.396**

(-2.10)

Estate Taxes

-0.303

(-1.22)

-0.299

(-1.37)

Top 10 Lawyer

0.038

(0.37)

-0.015

(-0.25)

Debt

-0.034

(-0.39)

-0.173***

(-3.28)

Size

0.063**

(1.99)

0.041*

(1.74)

Loss

-0.001

(-0.02)

-0.011

(-0.30)

LnProceeds

-0.055

(-0.91)

0.066

(1.24)

N 1,390 1,390 1,107 1,107

Adjusted R2 0.001 0.007 0.000 0.025

42

Table 7

When does Trust use Predict Post-IPO Returns?

This table regresses risk-adjusted stock returns during the first year following the IPO. In Columns 1 through 5 first day returns are included in the first year returns

measure and in Column 6 they are not. Abnormal Returns are computed relative to a matched firm. To obtain a matched firm we take all firms that have been public

for 5 years and have market capitalizations within 30% of the IPO firm and then select the firm with the most similar book-to-market ratio. The explanatory variable

of interest is TA Trust, measured as the percentage of CEO shares in a tax-advantaged trust, and its interaction with firm characteristics. We interact TA Trust with

Size, defined as the natural log of total pre-IPO assets, in Column 1, Loss, an indicator for a firm with negative pre-IPO ROA, in Column 2, Young Firm, an

indicator for a firm with age below the sample median of 9 years according to the Field Ritter database, and R&D Firm, defined using an indicator for a firm with

an above median pre-IPO R&D to assets ratio. Standard errors are clustered by three-digit SIC industries. T-statistics are presented below the coefficients with *,

**, and *** representing statistical significance at the 10%, 5%, and 1% levels, respectively.

(1) (2) (3) (4) (5) (6)

Year 1 Ab.

Returns

Year 1 Ab.

Returns

Year 1 Ab.

Returns

Year 1 Ab.

Returns

Year 1 Ab.

Returns

Year 1 Ab.

Ret. w/o UP

TA Trust 0.273

(1.22)

0.023

(0.17)

-0.055

(-0.44)

-0.031

(-0.19)

-0.044

(-0.20)

0.102

(0.58)

TA Trust × Size -0.201

(-0.63)

-0.455

(-1.33)

-0.431

(-1.30)

TA Trust × Loss

0.350**

(2.28)

0.106

(0.58)

0.101

(0.52)

TA Trust × Young Firm

0.537***

(2.81)

0.437*

(1.96)

0.353**

(2.12)

TA Trust × R&D Firm

0.418**

(2.07)

0.428**

(2.20)

0.224

(1.41)

Young Firm

0.052

(0.89)

0.063

(1.03)

0.022

(0.40)

R&D Firm

0.148*

(1.91)

0.156**

(2.15)

0.040

(0.83)

Size -0.047*

(-1.91)

-0.045*

(-1.91)

-0.040*

(-1.74)

-0.026

(-1.11)

-0.027

(-1.14)

0.087***

(4.48)

Loss 0.012

(0.14)

-0.016

(-0.19)

-0.019

(-0.25)

-0.052

(-0.48)

-0.093

(-0.89)

-0.102**

(-2.04)

Control Variables YES YES YES YES YES YES

N 0.039 0.040 0.044 0.046 0.051 0.036

Adjusted R2 1,570 1,570 1,570 1,570 1,570 1,570

43

Table 8

Corporate Tax Strategy and Individual Trust Strategy

This table provides the regression outputs from equation (3). In columns (1) and (2) we use GAAP tax expense per dollar of pre-tax income in the three most recent

years after going public, LR ETR, as the dependent variable. In columns (3) and (4) we use the sum of the firm’s cash taxes paid scaled by the sum of the issuers’

pre-tax income less special items in the three most recent years after going public, LR CETR, as the dependent variable. In columns (5) and (6) we the use the firm’s

long-term (three year) cash taxes paid from Henry and Sansing (2014), LR CTP, as the dependent variable. In columns (7) and (8) we use the standard deviation of

the firms’ cash effective tax rate for the three years following the IPO, σCETR, as the dependent variable. In columns (9) and (10) we the use the firm’s average

unrecognized tax benefits scaled by assets for the three most recent years after going public, LR UTB, as our dependent variable. All models include year-quarter

fixed effects. Standard errors are clustered at the three-digit industry level. Independent variable definitions are provided in Table 1. ***, **, * signify statistical

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

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

LR ETR LR ETR LT CETR LT CETR LR CTP LR CTP σCETR σCETR LR UTB LR UTB

TA Trust -0.084* -0.094** -0.021 0.001 -0.029*** -0.023* 0.076** 0.075** 0.005 0.006**

(-1.732) (-2.027) (-0.542) (0.019) (-3.020) (-1.66) (2.308) (2.096) (1.658) (2.163)

LnAge -0.008 -0.013 -0.018 -0.040 0.004

(-0.094) (-0.223) (-0.670) (-0.990) (1.525)

Founder 0.004 -0.016 -0.013 -0.026* -0.003***

(0.115) (-0.713) (-1.446) (-1.852) (-2.966)

LnEquityWealth 0.014 -0.086** 0.064*** 0.016 0.009**

(0.290) (-2.443) (3.268) (0.569) (2.080)

Estates Taxes 0.094 -0.067 0.182*** -0.166* -0.015***

(0.832) (-0.504) (3.256) (-1.921) (-3.359)

Top 10 Lawyer 0.023 -0.030 0.007 -0.020 -0.000

(0.488) (-1.206) (0.762) (-1.462) (-0.220)

PPE

0.007

-0.199***

0.006

-0.026

-0.012***

(0.129)

(-4.927)

(0.342)

(-0.791)

(-3.622)

RD

-0.130**

-0.197***

-0.073**

0.035

0.007*

(-2.434)

(-3.225)

(-2.211)

(0.592)

(1.807)

NOL

-0.057**

-0.030**

0.030***

-0.000

-0.000

(-2.579)

(-2.072)

(3.692)

(-0.002)

(-0.248)

Multi

0.001

0.029

-0.010

0.022

0.004**

(0.035)

(1.413)

(-1.251)

(0.970)

(2.374)

Debt

-0.077*

-0.013

0.045*

-0.012

-0.007***

(-1.705)

(-0.413)

(1.961)

(-0.659)

(-4.921)

44

(Table 8 continued)

Size

0.009

-0.013

-0.016**

-0.009

0.000

(0.754)

(-1.295)

(-2.563)

(-1.005)

(0.240)

LnProceeds

-0.002

-0.007

-0.050***

-0.004

0.000

(-0.070)

(-0.400)

(-3.908)

(-0.294)

(0.309)

Intercept 0.325*** 0.326 0.279*** 0.513** 0.036*** 0.308*** 0.134*** 0.423** 0.009*** -0.004

(27.684) (1.055) (29.884) (2.145) (4.999) (2.910) (21.414) (2.484) (10.866) (-0.284)

N 563 563 553 553 840 840 471 471 406 406

Adjusted R2 0.096 0.126 0.056 0.109 0.001 0.181 0.001 0.023 -0.005 0.099

45

Table 9

Subsidiary Location and Individual Trust Strategy

This table provides the regression outputs from equation (3). We investigate the association between firm

subsidiary locations and individual trust strategies. In columns (1) and (2) using OLS, the dependent

variable is Haven Subs, the natural log 1 + the total number of material subsidiaries operating in tax haven

countries in Exhibit 21 from their first 10-K following the IPO. In columns (3) and (4) using a Probit, the

dependent variable is an indicator variable equal to 1 (0) if the firm reports (does not report) a material

subsidiary in Exhibit 21 from their first 10-K following the IPO operating in a DOT country. Columns (1)

and (2) include year-quarter fixed effects. Standard errors are clustered at the three-digit industry level.

Independent variable definitions are provided in Table 1. ***, **, * signify statistical significance at the

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

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

Haven Subs Haven Subs DOT DOT

TA Trust 0.298*** 0.215** 2.354*** 1.873**

(2.865) (2.070) (3.521) (2.258)

LnAge -0.061 1.460

(-0.382) (0.820)

Founder -0.054 1.672**

(-1.430) (1.994)

LnEquityWealth 0.233** 0.997

(2.485) (1.475)

Estate Taxes 0.364 -0.920

(0.851) (-0.426)

Top 10 Lawyer 0.056 -0.346

(0.626) (-0.401)

PPE

0.324**

4.438***

(2.056)

(2.852)

RD

0.240**

1.355

(2.384)

(1.290)

NOL

-0.012

-3.485**

(-0.463)

(-2.271)

Debt

-0.255***

0.372

(-3.121)

(0.417)

Size

0.007

0.212

(0.237)

(0.877)

Loss

-0.021

0.546

(-0.327)

(1.364)

LnProceeds

0.045

-0.031

(0.915)

(-0.069)

Total Count

1.970*** 2.464***

(6.996) (3.369)

Total Subs 0.443*** 0.433***

(15.967) (15.756)

Intercept -0.102** -0.223 -6.887*** -16.003**

(-2.374) (-0.372) (-9.532) (-2.305)

N 470 470 470 470

Adj. (Pseudo) R2

0.491 0.505 (0.335) (0.455)