The Incidence, Valuation, and Management of Tax-Related Reputational Costs: Evidence from Negative Media Attention During Periods Characterized by High Scrutiny of Corporate Tax Avoidance

Abstract

In this study, we examine the incidence, valuation and management of tax-related reputational costs during the window surrounding the Occupy Wall Street (OWS) movement, a period characterized by heightened awareness and scrutiny of corporate tax avoidance. We report four main results. First, consistent with firms incurring tax-related reputational costs, we find that tax avoidance is positively associated with negative news media sentiment during the period surrounding the Occupy Wall Street (OWS) movement. Second, consistent with tax-related reputational costs resulting in negative valuation consequences, we find that (1) firm value, measured using Tobin’s q, is negatively associated with tax avoidance during the OWS period and (2) a hedge portfolio long (short) in firms exhibiting low (high) levels of tax avoidance generates significant positive abnormal returns during the OWS window. Third, consistent with firms taking actions to manage potential tax-related reputational damage, we find that firms experiencing the largest reputational costs during the OWS window exhibit higher tax rates in the following year. Fourth, to provide assurance that our results are due to reputational costs and not political costs, we re-estimate our analyses after excluding firms operating in politically-sensitive industries and find that all inferences hold. We provide some of the first large sample evidence of tax-related reputational costs and how these costs vary with public perception of tax avoidance.