whereas firms with weak corporate governance often have
opaque financial statements.
As we noted in the prior section, family-run firms in
emerging markets have used cross holdings and pyramid
structurestoeffectivelycementcontrolinthehandsoffamily
members. Bynot providingcomplete informationon cross
holdings,theymakeitdifficultforstockholderswhowantto
askthemrelevantquestionsabouttheprofitabilityandvalue
of these investments.
As afinal note,thereseems tobe some interplaybetween
political connections and the transparency of financial
statements.Ina seriesofstudies, Riahi-Belkaouifinds that
theopacityofearningsisdirectlycorrelatedtothepercentage
of politically connected firms in a market.
14
Tax Benefits
Firms cansometimes reduce their taxburdens by creating
holdingstructuresinlow-taxdomiciles.Forinstance,itisnot
uncommonforfirmsintheUnitedStatestohavesubsidiaries
intax-freelocalessuchastheCaymanIslandsand Panama
and to funnel income into these subsidiaries.
15 Complex holding structures also allow firms to shift
incomefromonesubsidiarytoanother,usingtransferpricing
andintercompanyloans.Inotherwords,firmscannotafford
to be transparent with shareholders if they prefer opacity
whenitcomestothetaxauthorities.Asageneralproposition,
complexityintaxlawswillgeneratecomplexityinfinancial
statements.Legislatorswhobemoanthelattershouldconsider
their role in creating the former.