Financial Accounting Effects of Tax Aggressiveness: Contracting and Measurement

This study examines a setting in which a tax‐reporting decision is delegated to a firm's tax manager. Using financial accounting measures of tax expense to evaluate the tax manager allows the firm to efficiently attain the level of tax avoidance it prefers, despite the fact that the consequences of the tax‐reporting decision will occur in the future. The study also examines how well two accounting measures of tax aggressiveness — cash taxes paid and the unrecognized tax benefit — distinguish between conservative and aggressive firms.