Electronic copy available at: http://ssrn.com/abstract=1325895 Beyond Tax Avoidance: Offshore Firms’ Institutional Environment and Financial Reporting* Artem Durnev University of Iowa Tiemei Li University of Ottawa Michel Magnan Concordia University Abstract We explore how firms’ operations in Offshore Financial Centers (OFCs), either through incorporation or subsidiaries, affect the quality of financial reporting. Using a large sample of firm-year observations from 21 OFCs, we find that offshore firms engage in more earnings management than non-offshore firms, with OFCs facilitating both accrual-based and real earnings management activities. We also document that as the offshore characteristics become more prevalent, firms are more likely to manage earnings through both accruals and real activities. These findings imply that the assessment of a firm’s institutional environment must encompass the registration status of its subsidiaries and affiliates. JEL Classification Codes: G15 (International Financial Markets), G34 (Corporate Governance), H26 (Tax Evasion), K22 (Corporation and Securities Law), M41 (Accounting), F36 (Financial Aspects of Economic Integration). Key Words: Offshore Financial Centers, Financial Reporting, Earnings Management. Current Version, December 2011 ______________________________________________________ * Artem Durnev, Tippie College of Business, University of Iowa, 5386 John Pappajohn Bus Bldg, Iowa City, the U.S. E-mail: artem-durnev@uiowa.edu. TieMei Li, Telfer School of Management, University of Ottawa, 55 Laurier east, Ottawa, Ontario, Canada. E-mail: tmsl@telfer.uottawa.ca. Michel Magnan, John Molson School of Business, Concordia University, 1455 de Maisonneuve Blvd. West, Montreal, Quebec, Canada. E-mail: mmagnan@jmsb.concordia.ca. We thank Utpal Bhattacharya, Luo He, Christian Leuz, JeongBon Kim, Yaqi Shi, Colin Thomson, Liandong Zhang, and Jun Zhan for their helpful comments and suggestions. We also thank the participants of the 2011 American Finance Association Meetings (AFA), 2009 CAAA and AAA conferences and workshops at Concordia University, ESSEC Business School, the University of Ottawa, and the University of Saskatchewan. Artem Durnev’s research is supported by the Institute de Finance Mathématique de Montréal (IFM2) and the Canadian Capital Markets Institute. Artem Durnev and Michel Magnan thank the Sciences & Humanities Research Council of Canada (SHRCC) and Fonds de recherche sur la societe et la culture (FQRCS) for their financial support. Michel Magnan acknowledges financial support from the Lawrence Bloomberg Chair in Accountancy.