Stock Liquidity and Corporate Tax-Avoidance: The Tale of Two Tails

Abstract

We examine the relation between stock liquidity and corporate tax avoidance. Utilizing a quantile regression framework we document the following key results: a) greater stock liquidity is positively (negatively) associated with the lower (upper) tail of the tax avoidance distribution; b) the effect of stock liquidity on both tails of tax avoidance distribution is magnified for firms with higher business uncertainty; and c) the effect of stock liquidity on the lower (upper) tail of tax avoidance distribution is attenuated (magnified) for the financially constrained firms. Our findings are consistent with the positive feedback theories of market microstructure where, by making share prices more informative to managers, greater stock liquidity affects firm’s tax planning.