Stock liquidity and corporate tax avoidance

We show that firms with higher stock liquidity engage less in extreme (i.e., overly aggressive or overly conservative) tax avoidance. The effect of stock liquidity on tax avoidance is economically meaningful and robust across alternative measures of tax avoidance and stock liquidity. The findings also hold after controlling for potential endogenous effects. We further document that the effect of stock liquidity on tax avoidance is amplified for firms with high proportions of activist shareholders and attenuated for firms with high levels of stock price informativeness. Overall, our findings suggest that stock liquidity mitigates extreme tax avoidance by enhancing shareholders’ monitoring over firm management.

     

Product market threats and tax avoidance

In this paper, we find that product market threats increase firms’ tax avoidance. This association is especially observed for firms that pursue tax avoidance more than their optimal target level (i.e., actively tax-avoiding firms). In addition, among these firms with active tax avoidance practices, firms with weaker corporate governance structure, lower financial flexibility, and greater predation risk are more likely to experience the positive relationship between product market threats and tax avoidance. Further evidence suggests that higher levels of tax avoidance driven by product market threats do not come with higher levels of tax uncertainty and rather positively affect firms’ profitability. This result highlights the decoupling relationship between tax avoidance and tax uncertainty.     

Credit refinancing and corporate tax avoidance

This study examines the disciplining effects of credit markets on firms’ corporate tax avoidance strategies. We show that, during adverse credit market conditions, firms with refinancing needs prefer to limit the after-tax cash flow benefits of tax avoidance to regain access to traditionally risk-averse credit markets. Our results show that firms increase their cash effective tax rate by two percentage points when facing refinancing constraints, and this effect is more pronounced for firms with lower asset redeployability and higher default probability. However, corporate governance mechanisms mitigate the relationship between tax avoidance and credit refinancing. Moreover, we show that firms decrease their tax avoidance strategies while leaving their leverage and debt shield unchanged. Overall, our findings are consistent with the observation that credit markets put pressure on tax-avoiding firms and contribute to the policy debate on disciplining tax avoiders.     

Corporate site visit and tax avoidance: The effects of monitoring and tax knowledge dissemination

This study examines how institutional investors' corporate site visits affect tax avoidance. Using quantile regressions, we find that corporate site visits decrease tax avoidance for firms at high levels of tax avoidance and increase tax avoidance for firms at low levels. The effect of corporate site visits on tax avoidance is stronger for firms subject to a weaker information environment, which suggests that institutional investors acquire additional firm-specific information via corporate site visits and play a more effective monitoring role. We also find that visitors who visited low-tax firms in prior years share tax-planning knowledge with high-tax firms which they visit in the current year. The effect of tax knowledge transfer is more pronounced when the visitors are from incumbent institutional shareholders. This study identifies corporate site visits as a channel via which institutional investors serve as monitors to managers and as facilitators of tax knowledge transfer.     

Chief financial officer co-option and tax avoidance in European listed firms

This paper investigates the impact of chief financial officer (CFO) co-option on corporate tax avoidance. Using hand-collected data from a sample of nonfinancial listed firms included in the S&P350-Europe from 2013 to 2019, we find that firms with co-opted CFOs exhibit higher levels of tax avoidance. We also find that the board membership of co-opted CFOs moderates their propensity to engage in tax avoidance. These results introduce novel evidence about the role of CFOs in influencing firms’ levels of tax avoidance. They also shed light on the monitoring activity of the board of directors in the presence of board members who are also key decision-makers in tax strategies.     

Tax avoidance,tax management and corporate social responsibility

This study examines the effect of three measures of corporate social responsibility (CSR) — corporate governance, community and diversity on tax avoidance in firms that use auditor‐provided tax services. This is one of the first studies, to our knowledge, to empirically relate tax avoidance, tax management and CSR literature. By separating the strengths and concerns for each CSR measure, we are able to analyze the effects of a firm's negative and positive social actions on tax avoidance. We find that the interaction of community concerns with tax management fees positively affects both GAAP and Cash ETR, while the interaction of corporate governance strengths and diversity concerns with tax management fees negatively affects Cash ETR. Our results are similar when we use Excess ETR that is not explained by firm specifics. We find additional evidence that CSR affects tax avoidance when we divide firms into portfolios based on CSR levels. Our findings suggest that future studies on tax avoidance and tax management should incorporate CSR.     

Corporate Governance,Tax Avoidance,and Financial Constraints

We examine how corporate governance affects the relationship between corporate tax avoidance and financial constraints. Conditional on having poor governance, tax avoidance is associated with greater financial constraints and a greater likelihood of financial distress. In firms with strong governance, however, we find that tax avoidance does not have a negative impact on financial constraints. Our results suggest that tax avoidance is a less useful source of financing for constrained firms when they are plagued with potential agency problems and opaque information environments. Stronger governance mechanisms can help firms mitigate the negative consequences of tax avoidance.     

Strategic reaction and tax avoidance: Evidence from the effect of large IPOs on peers

We examine whether and how industry peers use tax avoidance as a strategic mechanism to maintain their relative competitive positions. We exploit a unique setting where a relatively large private firm obtains capital, visibility, and creditability by going public (i.e., an IPO), imposing significant competitive pressure on its industry peers. We find that peer firms increase tax avoidance after large IPOs. Further analysis shows that the increase of tax avoidance is driven by firms with high growth needs and firms with high operating uncertainty, suggesting that tax aggressiveness is aligned with other strategic risk-taking changes to improve industry competitiveness. We rule out two alternative explanations: 1) existing peers use relative product market power to hedge against tax risk and engage in tax avoidance; 2) peers mimic the tax avoidance behavior of IPO firms. The main finding is supported by the difference-in-differences test with coarsened exact matching and a battery of robustness tests, including alternative measures and alternative large IPO selection criteria.     

Anti-Mafia Police Actions,Criminal Firms,and Peer Firm Tax Avoidance

Mafia firms introduce distortions in the markets in which they operate, increasing the cost of doing business for peer firms. We investigate whether peers respond by increasing their tax avoidance and thus increasing funds available to compete with the Mafia firms. Using a sample of Italian anti-Mafia police actions that resulted in the removal of Mafia firms and a difference-in-differences approach, we find that peers reduce their tax avoidance following these actions. We further show that, following anti-Mafia police actions, peer firms improve their performance and increase capital investment while enjoying a reduction in the cost of raw materials. Overall, our results highlight the microlevel channels through which Mafia can affect firm outcomes and local economies.     

Tax avoidance in family firms: Evidence from large private firms

Ownership structure plays an important role in firms’ decisions on tax avoidance. Recently, the effect of family ownership on corporate tax avoidance has become an issue of increasing interest among scholars from both the fields of family business research and tax research; however, empirical findings have so far remained ambiguous. Based on a unique sample of 678 large private firms from Germany, we show that for unlisted large firms (i) family firms avoid more tax than non-family firms, (ii) tax avoidance increases with the percentage of family ownership, and (iii) tax avoidance is a function of the number of shareholders. We interpret our results as evidence that benefits from avoiding taxes outweigh the non-tax costs in the case of large private family firms in Germany. Furthermore, as the number of family shareholders increases, family firms satisfy increasing demand for dividends by avoiding taxes.     

The effects of analysts’ tax expense forecast accuracy on corporate tax avoidance: An international analysis

A spotlight has recently been cast on the role of analysts as monitors of corporate tax planning, but investigations beyond the US are rare. After extension to the international setting, I investigate whether the strength of investor protection impacts the relationship between analysts’ tax expense forecast accuracy and tax avoidance. Using a sample from 24 countries, I find that firms with high analysts’ tax expense forecast accuracy engage in lower levels of tax avoidance than firms with low forecast accuracy; this relationship is greater for firms in countries with weaker investor protection. These findings suggest that the extent of country-level investor protection substitutes for firm-level governance in constraining managerial incentives for tax avoidance.     

International Corporate Tax Avoidance Practices: Evidence from Australian Firms

This paper examines the international corporate tax avoidance practices of publicly listed Australian firms. Based on a hand-collected sample of 203 publicly listed Australian firms over the 2006–2009 period (812 firm-years), our regression results indicate that there are several practices Australian firms use to aggressively reduce their tax liabilities. Specifically, we find that thin capitalization, transfer pricing, income shifting, multinationality, and tax haven utilization are significantly associated with tax avoidance. In fact, based on the magnitude and significance levels of the regression coefficients in our study, thin capitalization and transfer pricing represent the primary drivers of tax avoidance, whereas income shifting and tax haven utilization are less important. Finally, our additional regression results show that tax havens are likely to be used together with thin capitalization and transfer pricing to maximize international tax avoidance opportunities via the increased complexity of transactions carried out through tax havens.     

Political costs and corporate tax avoidance: Evidence from sin firms

The products and services of firms operating in sin industries (alcohol, tobacco, gambling, and firearms) run contrary to social norms and can produce significant negative externalities for society. As such, we expect that sin firms are at greater risk of incurring political costs in the form of additional regulation, higher excise taxes, or capital market intervention if they come under scrutiny for their income tax avoidance practices. Because of the nature of their products, regulators and policymakers are likely to face less pushback on new regulations or taxes on these firms. Sin firms start with a lower ability to influence the political process than firms in non-sin industries. Consequently, we hypothesize and find that sin firms exhibit less tax avoidance than non-sin firms, particularly through uncertain and more risky tax avoidance strategies. The negative relationship between the status of sin firms and tax avoidance is less pronounced in firms that accumulate political capital via intensive lobbying activities. Exploiting changes in partisan control of the Congress and White House, difference-in-differences tests show that firearm firms engage in less (more) tax avoidance when the Democrats (Republican) control both the Congress and White House. Overall, we conclude that political costs play an important role in corporate tax avoidance decisions.     

Effect of corporate tax avoidance activities on firm bankruptcy risk

Corporate tax avoidance has been shown to raise the cost of bank debt and lower credit and bond ratings. However, it is unclear whether tax avoidance actually increases a firm’s bankruptcy risk or whether it is just viewed negatively by banks and rating agencies. We find that firms engaging in tax avoidance and firms that are thinly capitalized face higher bankruptcy risk. To account for endogeneity and functional form misspecification, we verify our results using instrumental variable and propensity score matching methods. Our findings are consistent with the view that tax avoidance is a risk-enhancing activity.     

Taxes and Financial Constraints: Evidence from Linguistic Cues

Using a new measure of financial constraints based on firms’ qualitative disclosures, we find that financially constrained firms—firms that use more negative words in their annual reports—pursue more aggressive tax planning strategies as evidenced by: (1) higher current and future unrecognized tax benefits, (2) lower short‐ and long‐run current and future effective tax rates, (3) increase in tax haven usage for their material operations, and (4) higher proposed audit adjustments from the Internal Revenue Service. We exploit the unexpected closures of local banks as exogenous liquidity shocks to show that firms’ external financial constraints affect their tax avoidance strategies. Overall, the linguistic cues in firms’ qualitative disclosures provide incremental information beyond traditional accounting variables or commonly used effective tax rates to reveal and predict tax aggressiveness, both contemporaneously and in the future.     

Information processing costs and corporate tax avoidance: Evidence from the SEC’s XBRL mandate

The IRS uses information contained in financial statements as well as tax returns to detect tax avoidance behavior. We examine the impact on corporate tax avoidance behavior of reductions in the IRS’s information processing costs resulting from the mandatory adoption of XBRL for financial reporting. Motivated by the recent debate in the U.S. Congress over the cost-benefit of mandatory XBRL reporting for small firms, we pay particular attention to small firms, which inherently have relatively high information frictions. We find that the adoption of XBRL for financial reporting results in a significant decrease in tax avoidance. We further find that the negative relation between XBRL reporting and tax avoidance is less prominent for firms subject to more intense IRS monitoring in the pre-XBRL-reporting period. Overall, our results suggest that XBRL reporting reduces the cost of IRS monitoring in terms of information processing, which dampens managerial incentives to engage in tax avoidance behavior.     

Tax avoidance and ex ante cost of capital

This study examines the association between tax avoidance and ex ante cost of equity capital. Based on prior research, we develop two proxies for investors’ expectations of tax avoidance and explore whether deviations from those expectations result in higher ex ante cost of equity capital. We find that the ex ante cost of equity capital increases with tax avoidance that is either below or above investor expectations and that the increase is larger for tax avoidance that exceeds investors’ expectations. We then examine whether firms that alter their future tax avoidance exhibit a lowering of their ex ante cost of equity capital and find that tax avoidance decreases (increases) from the prior year for firms that were above (below) investors’ expectations in the prior year. These results are consistent with the trade‐off suggested by the Scholes and Wolfson framework and reinforce the notion that balancing tax benefits and non‐tax costs is an important feature of firms’ tax planning.     

Ownership Concentration,State Ownership,and Effective Tax Rates: Evidence from China’s Listed Firms*

This paper examines the effect of ownership concentration and state ownership on the tax reporting practices of China’s publicly listed firms. I argue that ownership concentration and state ownership are important for tax reporting practices in China because listed firms have high ownership concentrations and high levels of state ownership. Using a sample of 758 listed Chinese firms over the 1998–2008 time period, I find that firms with concentrated share ownership have lower effective tax rates. I also find that firms whose largest shareholders are government‐related have higher effective tax rates compared to firms whose largest shareholders are nongovernment related. In other words, the nature of the largest shareholder (government vs. nongovernment) matters. I also show that ownership‐concentrated firms are able to achieve preferential statutory tax rates compared to firms with low ownership concentration regardless of the identity of the largest shareholder.     

Saving or tunnelling: value effects of tax avoidance in Chinese listed local government-controlled firms

This paper investigates the value effect of tax avoidance and its underlying mechanisms among Chinese listed local government-controlled (LG) firms. We show that tax avoidance does not promote firm value in LG firms with government ownership smaller than 40 percent and the above negative tunnelling effect is more pronounced when the control rights are concentrated in the local government and weaker when other large shareholders can act as a countervailing force. Finally, we observe a positive relation between tax avoidance and related-party transactions as well as overinvestment, again indicating a tunnelling effect in LG firms with government ownership smaller than 40 percent.     

Regional favoritism and tax avoidance: evidence from China

This paper investigates the effect of officials’ regional favoritism on corporate tax avoidance activity in China. We find that firms located in regions that were formerly administered by the current provincial governors have a higher level of tax avoidance than other firms in the province. Further evidence indicates that regional favoritism affects tax avoidance through two channels: regional politicians’ personal connections with the governor and firms’ political access to the governor. Overall, the findings support China's current official selection and promotion guidelines that restrict hometown favoritism. Our results further imply that favoritism can also extend to officials’ former administrative regions.