ABSTRACT: Recent evidence suggests that corporate tax shelters have become important corporate instruments for reducing tax burden. Based on a sample of identified tax shelter participants, I develop a profile of the type of firm that likely engages in tax sheltering. The model detects tax shelter participants through the use of variables predicted to be either affected by or associated with tax sheltering. I find that firms actively engaged in tax sheltering exhibit larger ex post book‐tax differences and more aggressive financial reporting practices. Using this model of tax shelter firm characteristics, I identify a broad sample of predicted tax shelter firms from the population of firms. I then examine whether tax sheltering is associated with wealth creation for shareholders or with managerial opportunism. I find that active tax shelter firms with strong corporate governance exhibit positive abnormal returns. This finding is consistent with tax sheltering being a tool for wealth creation in well‐governed firms.

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