Abstract
This study aims to analyze the relationship between tax aggressiveness and the risks associated with the variation of returns in Brazilian companies’ stock, particularly regarding the systematic and idiosyncratic risks. The sample was formed by companies that composed the IBOVESPA index in the period between 2011 to 2016. The measurements of tax aggressiveness were the effective tax rate and the temporary book-tax differences. The results showed a significant relationship between tax aggressiveness and risk, concluding that the higher the tax aggressiveness, the lower the beta and the higher the idiosyncratic risk. The finding for the direct relationship between tax aggressiveness and idiosyncratic risk is in line with the literature, reflecting the dispersion of probable returns due to tax deferral practices and associated tax risks. The inverse relationship between market risk and tax aggressiveness may represent a greater attractiveness for these stocks in investment portfolios that seek less exposure. Tax aggressive firms would behave as a hedge in a diversified portfolio because they are less sensitive to market variations. This study is essential because it maps the effect of tax aggressiveness on the financial risks related to Brazilian companies’ shares, as well as being useful to investors, portfolio and business managers.
Highlights
Brazil has a complex tax system, and its different users have a hard time understanding its particularities. is complexity is a result of the system laws, either because they allow stretching interpretations and because of their loopholes
For Vello & Martinez (2014), organizations that are inefficient in tax planning have a higher tax burden than the competition in the sector. at undermines their competitive potential and increases their risk level in comparison to other companies. e authors suggest the existence of a signi cant and opposing relationship between systematic risk and the degree of efficient tax planning in organizations that adopt best practices in governance
between market risk (Beta)(t+1) is the company’s period Beta market; TBTD is the measurement of the temporary book-tax difference; the ETR is the effective tax rate; NM represents the B3 stock exchange segment called ‘Novo Mercado’; SIZE is the rm’s size; FINLEV is the nancial leverage, and ROE is the return on equity; α0 is the intercept and # is the error associated with the model
Summary
Brazil has a complex tax system, and its different users have a hard time understanding its particularities. is complexity is a result of the system laws, either because they allow stretching interpretations and because of their loopholes. Tax aggressive rms increase their risk level in the capital market, raising doubts about their ability to effectively plan their tax burden (which generates uncertainties about their future results). Ey suggest that companies that adopt best practices in corporate governance show a signi cant and opposing relationship between systematic risk and the degree of efficient tax planning Companies encourage their managers to use risky strategies, seeking to maximize their returns, and accepting a higher level of risk. As mentioned in the introduction of this article, tax aggressive companies increase their risk level in the capital market, putting in check their ability to conduct effective tax planning and generating uncertainties about their future results. Depending on how the market sees tax risks it will de ne the beta of a company in a future period
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