Corporate tax avoidance and stock price crash risk: Firm-level analysis |
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Authors: | Jeong-Bon Kim Yinghua Li Liandong Zhang |
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Institution: | 1. Department of Accountancy, City University of Hong Kong, Tat Chee Avenue, Kowloon, Hong Kong;2. Krannert School of Management, Purdue University, West Lafayette, IN 47907-2056, United States |
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Abstract: | Using a large sample of U.S. firms for the period 1995–2008, we provide strong and robust evidence that corporate tax avoidance is positively associated with firm-specific stock price crash risk. This finding is consistent with the following view: Tax avoidance facilitates managerial rent extraction and bad news hoarding activities for extended periods by providing tools, masks, and justifications for these opportunistic behaviors. The hoarding and accumulation of bad news for extended periods lead to stock price crashes when the accumulated hidden bad news crosses a tipping point, and thus comes out all at once. Moreover, we show that the positive relation between tax avoidance and crash risk is attenuated when firms have strong external monitoring mechanisms such as high institutional ownership, high analyst coverage, and greater takeover threat from corporate control markets. |
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Keywords: | G12 G14 H26 M41 |
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