An Investigation of the Behavioral Influences of Tax Contexts on Individual Savings and Investment

Abstract

This dissertation consists of three chapters that collectively examine the behavioral influences of tax and accounting contexts on individual savings and investment decisions. The first study, presented in Chapter 2, experimentally investigates how timing of tax incentives and the organization of tax-incentivized financial accounts influences individuals’ savings behaviors. Tax incentives intended to encourage private savings often require individuals to maintain multiple accounts with varied tax treatments, potentially increasing the difficulty of savings. In response, legislators and researchers have argued that this patchwork approach to encouraging savings should be replaced by Universal Savings Accounts (USAs). Drawing on mental accounting theory’s psychological benefits and costs, I experimentally study the potential implications of this single versus multiple account structure and different tax timing regimes on individual savings behavior. I find that easier tracking of progress and envisioning of savings usage afforded by multiple accounts encourages savings, while deferred tax timing inhibits savings through a combination of worry about future taxes and difficulty evaluating savings progress. The second paper, presented in Chapter 3, examines how information regarding a corporation’s tax minimization activities and primary operations jointly influence investor behavior. Prior research has identified fear of investor backlash as a primary curb on corporations’ tax minimization (Graham, Hanlon, Shevlin, and Shroff 2014). However, empirical evidence for such reactions remains mixed (Brooks, Godfrey, Hillenbrand, and Money 2016; Gallemore, Maydew, and Thornock 2014). Drawing on the psychological framework of legitimacy theory (Zelditch 2018), I propose and find that the interaction between operations-level validity and tax-level propriety influences investor behavior. For companies with lower perceived validity in their primary operations, perceived improper tax minimization elicits strong negative reactions from investors, while proper tax minimization partially compensates for a lack of validity. Conversely, companies with greater perceived operational validity are mostly insulated from negative reactions to deemed improper tax strategies. Thus, management concerns over the reputational risks of tax minimization may be misplaced in some contexts, as companies whose primary operations are more valued by society may be afforded more leeway in their tax strategies.