Wednesday, January 15, 2020
Danielle Chaim (J.S.D. 2020, Columbia), The Perils of Common Ownership: Flooding Strategy:
The increased concentration of shares in the hands of large institutional investors has triggered a phenomenon which I term “flooding.” Under this phenomenon, institutional investors push their portfolio firms towards higher levels of noncompliance. Given limited enforcement capabilities, the simultaneous increase in the levels of noncompliance reduces the probability that such behavior will be detected and adequately penalized. Consequently, the presence of large, diversified shareholders destructs the inherent trade-off between compliance and enforcement. Misconduct becomes less risky and more rewarding, changing the way in which public firms approach legal risks.
This Article focuses on the applicability of flooding in the context of tax avoidance. Data suggests that the emerging ownership pattern in the United States increases levels of corporate tax avoidance. In this Article, I argue that this increase results in flooding, overwhelming the tax agency, now faced with new enforcement challenges.
I suggest pathways that link institutional ownership to tax noncompliance, while emphasizing that neither direct communication between institutional investors and managers of portfolio firms nor coordination or collusion between corporate managers, is necessarily required for the formation of flooding. Finally, I propose a double sanctions regime under which institutional investors will be penalized for the tax avoidance behavior of their firms. Such a regime will moderate the incentive to engage in higher levels of tax avoidance by public corporations and their institutional shareholders.