Abstract
This paper examines whether financial statement comparability (hereafter referred to as comparability) is associated with corporate tax avoidance. We document the negative relationship between comparability and tax avoidance. Our findings indicate that comparability reduces information asymmetry, which makes the monitoring of managerial activities more effective. In addition, comparable information may increase the risk of detection of aggressive tax strategies, which leads to reputational, regulatory and political risks. We further examine how analyst coverage and product market competition influence the relationship between comparability and corporate tax avoidance. The results show that analyst coverage substitutes for the effect of comparability on tax avoidance. However, we do not obtain any conclusive evidence that product market competition plays a complementary role to comparability in reducing tax avoidance. Our results are robust to the various measures of comparability and tax avoidance and alternative methodological techniques.
Highlights
The immense importance of taxes due to their role in economic development and public welfare has made tax research imperative (Streimikiene, Raheem Ahmed, Vveinhardt, Ghauri, & Zahid, 2018)
We note that the three tax avoidance proxies (TA_RATE, TA_BTD and TA_DDBTD) are positively correlated with each other and the two comparability proxies (CompAcc4 and CompAcc10) are highly positively correlated, which suggest that different measures of tax avoidance and comparability are consistent
TAit 1⁄4 b0 þ b1CompAccit þ b2Sizeit þ b3Levit þ b4ROAit þ b5MBit þ b6PPEit þb7Intangit þ b8Inventit þ b9Dualit þ Region þ Industry þ Year þ eit CompAccit 1⁄4 a0 þ a1TAit þ a2ABSDAit þ a3ROAit þ a4STDSalesit þ a5Sizeit þ a6Levit þa7MBit þ a8Instit þ a9Big4it þ Region þ Industry þ Year þ eit taxes play an important role in corporate decisions, the effect of financial statement comparability on corporate tax avoidance has been overlooked in the accounting and tax literature
Summary
The immense importance of taxes due to their role in economic development and public welfare has made tax research imperative (Streimikiene, Raheem Ahmed, Vveinhardt, Ghauri, & Zahid, 2018). The academic and public interest in tax avoidance has increased in recent years. Public pressure (Dyreng, Hoopes, & Wilde, 2016) coupled with strong media attention has placed corporate tax avoidance under the spotlight. Policy makers around the world have intensified their efforts to curb tax avoidance. Corporate tax avoidance has repercussions for business (Lazar & Istrate, 2018) and society. Tax avoidance affects corporate reputations (Graham, Hanlon, Shevlin, & Shroff, 2014), future profitability (Katz, Khan, & Schmidt, 2013), firm values (Chang, Hsiao, & Tsai, 2013; Chang et al, 2013), stock
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