The Shareholder Response to Corporate Tax Planning Advice Regulation

We examine the shareholder response to heightened regulation of corporate tax planning advice through the covered opinions rules under U.S. Treasury Department Circular No. 230. These rules imposed extensive due diligence obligations and drafting requirements on tax professionals for a broad range of written tax advice. Despite overwhelming criticism from tax professionals, stock returns reveal a positive shareholder response to the promulgation of the rules, equating to a $12.33 billion aggregate increase in shareholder value. Consistent with shareholders believing that the benefits of the rules—deterrence of excessively risky tax planning and increased monitoring—would offset the burdens, we find that the shareholder response was more positive for firms with higher tax risk, weaker monitoring, and higher tax risk coupled with weaker monitoring. Overall, these findings provide new evidence that shareholders perceive regulations aiming to curtail risky tax planning as value enhancing when they target tax professionals rather than taxpayers.