The Trade-Off between Tax Savings and Financial Reporting Costs: An Analysis of the Effective Tax Rates of Glamour Companies

Abstract

This study investigates whether glamour companies have higher effective tax rates than value companies. Glamour companies are defined using a Lakonishok et al. (1994) definition as companies that have a high price-to-earnings ratio and high sales growth. Conversely, value companies have a low price-to-earnings ratio and low sales growth. This study hypothesizes that glamour companies will have higher effective tax rates than value companies due to unique financial reporting pressures faced by glamour companies. To test the hypothesized relationship, companies are separated into glamour and value company portfolios and tested using an ordinary least squares regression model. A sample of 916 glamour and value companies indicates that, as hypothesized, glamour companies have higher effective tax rates than value companies after controlling for size, leverage, capital intensity, multinational operations, and industry. The results are robust to different glamour company and ETR constructs. This finding is consistent with glamour companies having greater financial reporting pressures that reduce the willingness of glamour company management to undertake aggressive tax reduction strategies that could have a negative impact on financial income.