The Influence of a Firm's Business Strategy on its Tax Aggressiveness

Abstract

We examine the relation between a firm’s business and tax planning strategies. To identify firms’ business strategies we use a comprehensive measure of business strategy based on the theoretical framework of Miles and Snow (1978, 2003). Specifically, we first investigate whether a firm’s business strategy is associated with its level of tax avoidance. Next, we investigate the association between the firm’s business strategy and the extent to which it avoids tax in an aggressive manner. We find that firms following Miles and Snows’ Prospector (innovation and risk seeking) strategy avoid more taxes than both Defender firms (cost leadership and risk aversion) and firms following a more general (Analyzer) strategy. We find that Prospectors also appear to undertake more aggressive and less sustainable tax positions than Defenders. Thus, our business strategy measure appears not only to capture Prospectors’ taking advantage of tax planning opportunities that result from their innovation strategy, but also reflects their greater willingness to undertake risk and deal with uncertainty.