Abstract
This study has investigated the potential relationship between equity liquidity and tax aggressiveness in the Brazilian capital market. Using a database of publicly traded Brazilian companies from 2010 to 2019 – not including the year 2020 due to the atypical effects of the COVID-19 pandemic – panel data models have been developed, the goal synthesis of which consisted in evaluating the longitudinal effects of equity liquidity, independent variable, on the book tax difference, dependent variable, and proxy of tax aggressiveness. Results have shown a statistically significant and economically positive relationship between the tax aggressiveness proxy and stockholding liquidity. Results suggests that companies with less volatile stocks, with larger relative stocks in B3 [(in full, B3 – Brasil Bolsa Balcão S.A.), formerly BMFBOVESPA, a stock exchange located at São Paulo, Brazil] businesses and lower trading costs tend to adopt a more aggressive tax planning. This article helps to demonstrate that in an emerging capital market such as the Brazilian one investor tend to belittle occasional increases in profits sparingly through more aggressive tax practices, however, which may result in future losses. Furthermore, this study helps to demonstrate the importance of disclosures about tax planning so that market agents can properly price financial assets.
Highlights
The main objective of this study was to evaluate potential correlations between the liquidity of publicly traded Brazilian companies and the tax aggressiveness proxy
This study has investigated the potential relationship between equity liquidity and tax aggressiveness in the Brazilian capital market
It is appropriate to establish in advance that the concept of tax aggressiveness is not to be confused with the idea of tax evasion since the essence of this concept stems from the execution of strictly legal activities and efficient planning, which cause the reduction of the explicit tax burden, increasing the business returns (Chen, Chen, Cheng and Shevlin, 2010; Scholes, Wolfson, Erickson, Maydew and Shevlin, 2014)
Summary
The main objective of this study was to evaluate potential correlations between the liquidity of publicly traded Brazilian companies and the tax aggressiveness proxy. Tax aggressiveness can result in greater difficulties in projecting a company’s cash flows in addition to hiding certain risks of assessments by tax authorities (Cao and Wan, 2014) In this context, it is expected that market agents monitor publicly traded corporations to obtain relevant information to price equity instruments about tax planning so that this monitoring is greater for stocks with greater liquidity (Bebchuk and Weisbach, 2010; Chen, Ge, Louis and Zolotoy, 2019). The results of this study reinforce the importance of wide dissemination of tax management practices since such disclosures have the power to reduce any bolder tax planning which, they may result in an increase in present profits, may culminate in future reductions of cash flows This reduction is due to tax assessments and costs of legal consultants to mitigate potential consequences of these tax assessments (Hanlon and Heitzman, 2010; Blaylock, Shelvin and Wilson, 2012; Vello and Martinez, 2014)
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