FOR IMMEDIATE RELEASE
CONTACTS: Bill Caldwell, Pace University, 212-346-1597, firstname.lastname@example.org;
Chris Privett, Duke University, 919-660-8090, email@example.com
STUDY OF CORPORATE TAX SHELTERS WINS JENSEN PRIZE
Researchers found shelters not only save tax payments but enhance attractiveness to investors
New York, NY – June 11, 2007 – A publication documenting the impact of tax shelters on corporate debt policy by researchers at Duke University’s Fuqua School of Business and Pace University’s Lubin School of Business has been awarded the coveted 2006 Jensen Prize for Corporate Finance and Organizations, presented by the Journal of Financial Economics (JFE).
The study, published in the September 2006 issue of the JFE, found that use of corporate tax shelters not only lets organizations avoid billions of dollars in annual tax payments, but also helps companies enhance their attractiveness to investors by reducing levels of debt and therefore leverage and risk.
The study also explores some commonly used tax shelters and the characteristics of firms that have employed these shelters.
Major companies, major financial advisors. Each year, the editorial office of the JFE collects votes from readers for the best papers published by the Journal. The prize is named for Michael C. Jensen, Jesse Isidor Straus Professor of Business Administration, Emeritus at the Harvard Business School and Founding Editor of the JFE.
Finance professors John R. Graham of Duke’s Fuqua School of Business and Alan L. Tucker of Pace’s Lubin School of Business collected the largest known sample of tax sheltering corporations, including such household names as BB&T Corp, Colgate-Palmolive Company, Compaq, Fleet Boston Financial Corp., Microsoft, United Parcel Service and Winn-Dixie. The shelters were devised or brokered by firms including Goldman Sachs, Merrill Lynch and Twenty First Security Corporation.
The paper presents an overview and analysis of eight common tax sheltering strategies used by the companies in the sample. Many of the strategies involve use of foreign partners or subsidiaries, or corporate-owned life insurance plans.
$1bn in annual deductions. The researchers demonstrated that sheltering firms have debt-to-total asset ratios that are one-third lower than comparable firms that do not use tax shelters. Because they have less debt, companies that use tax shelters appear less risky to investors. According to the researchers, this reduced debt can lead to better credit ratings, cheaper borrowing rates and less risk of violating corporate covenants.
The median tax shelter led to tax deductions of about $1 billion per year.
Graham and Tucker also identified the characteristics of firms most likely to use tax shelters. The researchers found large firms, firms with foreign operations and those with substantial research and development expenses were most likely to use tax shelters. This analysis should help investors, or the IRS, identify the types of firms that might be likely to use tax shelters.
The published version of Graham and Tucker’s paper, “Tax Shelters and Corporate Debt Policy,” is available at Elsevier’s ScienceDirect web site http://www.sciencedirect.com/science/journal/0304405X .
Duke’s Fuqua School of Business was founded in 1970. The school’s mission is to educate business leaders worldwide and to promote the advancement of business management through research. For more information, visit www.fuqua.duke.edu .
Pace’s Lubin School of Business is accredited for both business and accounting by AACSB International, an elite distinction shared by fewer than 3% of business schools worldwide. With a tradition of practice-oriented curriculum, the School has achieved national recognition for both its graduate and undergraduate programs in U.S.News & World Report and other media. Approximately 5,000 students are enrolled in Lubin’s undergraduate, graduate and professional degree programs in Downtown and Midtown New York City, and Pleasantville and White Plains in Westchester County, New York. Prominent alumni include Melvin Karmazin, CEO, Sirius Satellite Radio; James Quinn, president, Tiffany & Co.; Ivan Seidenberg, chairman and CEO, Verizon; Marie Toulantis, CEO, Barnes&Noble.com; and Richard Zannino, CEO, Dow Jones & Company. www.pace.edu/lubin