Corporate Tax Behavior Research Articles

Do stock prices affect corporate tax behavior?

Purpose This study aims to examine how firm-specific information in stock prices influences corporate tax behavior. Design/methodology/approach This study uses ordinary least squares (OLS) regressions to examine the association between stock price informativeness and effective tax rate (ETR) volatility. Findings Stock price informativeness is positively associated with short-term tax avoidance as measured by ETR volatility. Originality/value While prior research examines the association between market activity and the level of ETRs, this study examines other various aspects of tax behavior.

The Influence of Corporate Governance on Tax Avoidance and The Role of Independent Auditors in Vietnamese Firms

This research addresses how corporate governance mechanisms influence tax avoidance in Vietnamese firms and the role of independent auditors in detecting or mitigating tax avoidance. The purpose of the research is to explore the relationship between corporate governance structures (e.g., independent boards, audit committees) and tax behavior, as well as to assess how auditors interact with these governance mechanisms to ensure tax compliance. A qualitative case study approach was used to analyze six companies from different sectors and governance models (2 state-owned enterprises; 2 family-owned private companies; and 2 publicly listed companies) through 18 interviews conducted between May 2024 and October 2024 with 3 key individuals from each company, including: Independent auditor; Company CEO; Manager or administrator, along with documentary analysis of financial statements and tax filings. The research found that firms with stronger governance (e.g., independent boards and active audit committees) are less likely to engage in tax avoidance, while weak governance structures often lead to more aggressive tax strategies. Independent auditors were more effective in well-governed firms, but faced ethical challenges in weaker ones. These findings are significant because they highlight the importance of strengthening governance frameworks and ensuring auditor independence to reduce tax avoidance and improve corporate transparency in Vietnam.

Does Firm Size Buffer Tax Aggressiveness? Examining Financial Distress and Capital Intensity

This study investigates the relationships between financial distress, capital intensity, and tax aggressiveness, focusing on the moderating role of firm size. Utilizing a sample of property and real estate companies listed on the Indonesia Stock Exchange from 2021 to 2023, the research employs quantitative methods to analyze the influence of financial distress and capital intensity on tax aggressiveness. The findings reveal that financial distress significantly increases tax aggressiveness, indicating that firms facing economic challenges are more likely to pursue aggressive tax strategies to enhance their cash flow. Additionally, capital intensity is positively associated with tax aggressiveness, as firms leverage their capital assets for potential tax benefits. However, the study finds that firm size does not significantly moderate the relationships between financial distress or capital intensity and tax aggressiveness, suggesting that the effects of these variables are consistent across different firm sizes. These results underscore the complex dynamics of corporate tax behavior and highlight the need for firms to carefully consider their tax strategies in the context of financial conditions and capital structure. The research contributes to a deeper understanding of tax aggressiveness in emerging markets and provides implications for corporate managers and policymakers regarding tax planning and regulation

Unveiling the factors shaping corporate tax behavior: an empirical study

Research aims: This research investigates the determinants of corporate tax management practices through an empirical analysis. It examines the influence of various factors, including profitability, leverage, capital intensity ratio, presence of independent commissioners, firm size, and access to tax facilities.Design/Methodology/Approach: Multiple linear regression analysis was employed as the research methodology. The study focused on manufacturing companies in the basic industrial and chemical sectors listed on the Indonesia Stock Exchange during the period from 2018 to 2021, utilizing a purposive sampling approach—the final sample comprised 18 companies that met the specified criteria.Research Findings: The results indicated that profitability and tax facilities exhibited a negative impact on tax management, while leverage had a positive influence. Conversely, the capital intensity ratio, presence of independent commissioners, and company size did not significantly affect tax management.Theoretical Contribution/Originality: Effective tax management can enhance company compliance with tax obligations and mitigate the likelihood of aggressive tax strategies.Practitioner/Policy Implications: This research provides a valuable benchmark for companies to implement sound tax management practices aligned with tax regulations. Additionally, it offers insights for policymakers to refine tax regulations accordingly.

The correlation between deferred taxes, tax accruals and cash fl ows of Russian companies

This paper confirms the informational value of deferred taxes for assessing tax accruals and their corresponding cash flows. Currently, many experts point out that recording tax effects distorts the perception of financial reality and does not lead to optimal business decisions, and modern research denies the connection of balance sheet deferred taxes with future cash flows at all. The above aspects are considered and tested for Russian organizations for the period of 2012–2018 using standard econometric analysis techniques. The inclusion of deferred tax factors leads to significant volatility in both tax accruals and tax cash flows, depending on which net deferred tax position is held by the economic entity. The findings show that with active positions, national organizations accrue almost 7.8–10.0% more and at the same time pay 8.1–8.7% less tax to the budget relative to other situations. Based on the confirmed hypotheses, the study develops a conceptual scheme to link tax accruals with deferred tax positions, which allows us to analyze the current corporate tax behavior of a company and its potential tax opportunities. The results show that the change in tax accruals in the structure of financial profit before tax on average increase tax cash flows 1.28–1.41 times, while tax accruals increase 0.46–0.54 times with a 1% increase in tax cash flows. The statistical significance of dividend (income payments to business owners) and investment policy (acquisition of non-current assets) factors for the evaluation of tax accruals and cash flows is also established. The findings provide a wide range of tools for further research in profit stability analysis, bankruptcy signs, and solvency of Russian organizations.

The effect of shareholder scrutiny on corporate tax behavior: Evidence from shareholder tax litigation

AbstractThis study examines the effect of shareholder scrutiny of corporate tax avoidance behavior and its related financial reporting. Specifically, we explore the factors associated with shareholder tax litigation and its effect on the future tax behavior of the sued firm and its peers. We find that sued firms have lower cash and GAAP effective tax rates (ETRs) and engage in extreme tax avoidance before litigation. After litigation, they decrease tax avoidance activities, relative to matched control firms. Peer firms in the same industry as sued firms similarly reduce their level of tax avoidance and the likelihood of extreme tax avoidance after the litigation, relative to control firms. Additional analyses suggest that sued firms change their tax avoidance behavior, rather than merely their tax financial reporting. Finally, the spillover results are strongest for peer firms with the most tax avoidance (i.e., the lowest cash ETRs) when the sued firm's alleged misconduct is revealed.

Geopolitical risk and corporate tax behavior: international evidence

PurposeThis study examines the association between geopolitical risk (GPR) and corporate tax, which is a major source of revenue for the government and a significant explicit cost for firms. The authors use a comprehensive measure of GPR to study its effects on corporate taxes by using an international sample.Design/methodology/approachThe authors adopt the geopolitical measure constructed by Caldara and Iacoviello (2022) as a proxy for GPR and cash-effective tax rate benchmarked with statutory tax rate to measure corporate tax avoidance. The authors employ panel regression with fixed effects (FEs) to investigate the impact of GPR on corporate tax avoidance. The authors also conduct a battery of robustness tests to ensure the strength of the study’s results.FindingsThis study’s empirical results indicate that sample firms increase their tax avoidance amid increasing GPR. Further analyses show that financial constraints incentivize firms to avoid taxes during rising geopolitical tensions. The authors also provide evidence on the role of firm-level and country-level governance in weakening the association between GPR and tax avoidance.Practical implicationsPolicymakers and governments may strengthen the enforcement rule to limit aggressive tax practices of corporates during GPR to balance fiscal deficit. In addition, this study sheds light on the debate among administrators and politicians over the efficacy of current tax laws and governance structures in the presence of heightened GPR.Originality/valueThe authors extend the literature on GPR by analyzing its effect on corporate tax avoidance. Unlike existing single-country studies, the authors use a cross-country setup to investigate the impact of GPR on tax avoidance, making this study’s results more generalizable as the authors control for a host of country, industry, and time factors. Apart from political uncertainty, terrorism, and climatic issues, the authors document GPR as a strong macroeconomic driver of corporate tax avoidance. The authors make a new contribution to the literature on the moderating role of governance and institutional factors on the association between tax avoidance and GPR in an international context. The authors also contribute to the literature on macroeconomic determinants of tax avoidance.

The Big 4 Under Pressure: Scanning Work in Transnational Fields*

ABSTRACTWe investigate what happens when accounting professionals come under external pressure to change established practices. We focus on corporate tax transparency, which has become an important battleground as stakeholders increasingly demand more information on corporate tax practices. While the Big 4 global accounting firms have traditionally played a dominant role in shaping what is perceived as acceptable corporate tax behavior, activists and critical politicians have recently mobilized public attention, challenging how accounting professionals legitimate their practices. We provide evidence of these challenges from 33 interviews and participation in 13 professional events from 2013 to 2019. We conceive of the confrontation between dominant professionals and challengers as taking place in a transnational “field,” where a range of actors struggle over how a common object—corporate tax transparency—is defined and treated. This approach helps us understand how the Big 4 navigate new challenges while seeking to maintain control over professional practices. Our interviews and observations show that Big 4 professionals are sensitive to political challenges, requiring that they engage in what we characterize as “scanning work”—ongoing activity to search for, identify, and assess challenges—to fend off outside interventions. Our analysis has important implications for further research. First, the need for scanning work when facing transnational political pressure implies a different way of seeing interactions between accounting professionals and (global) society at large. Second, viewing global accounting from a transnational field lens helps us identify complex sources of change external to already‐powerful actors.

Corporate tax behavior and political uncertainty: Evidence from national elections around the world

AbstractWe construct a sample of firms in 36 countries with 158 elections to examine corporate tax behavior in the face of political uncertainty. We define political uncertainty as unmeasurable unpredictability regarding governmental policies or regulatory shifts, such as tax rates, tax enforcement and general economic conditions, emanating from a possible change in political leadership. If insufficient information exists to develop plausible expectations about future tax‐related outcomes, ambiguity‐averse managers will attend to relatively more pessimistic priors and assume the worst‐case scenario. We expect firms to increase tax avoidance in election years given uncertainty regarding the post‐election tax and macroeconomic environment. Our results are consistent with this argument. Firms increase their corporate tax avoidance in election years, consistent with managers exercising current tax planning strategies while it is still most optimal to do so given post‐election uncertainty. The effect is increasing in the political uncertainty associated with the election. Specifically, for elections that are closely contested, representing uncertainty regarding the victor, or held in countries with fewer electoral checks and balances, representing uncertainty regarding the ease of effectuating potential post‐election changes. We document increased reshuffling of tax burdens across firms after elections, further supporting that elections reflect periods of heightened tax uncertainty.

Discussion of Dhaliwal, Goodman, Hoffman, and Schwab (2019): Revisiting Tax-Related Reputational Costs

Discussion of Dhaliwal, Goodman, Hoffman, and Schwab (2019): Revisiting Tax-Related Reputational Costs

Board Level Employee Representation and Tax Avoidance in Europe

AbstractIn part due to recent disclosures of large-scale tax evasion (e.g. Panama Papers), corporate tax avoidance has become a prominent public policy issue around the world. An increasing amount of research on this topic has focused on identifying the determinants of tax avoidance at the company and country level. Many newer studies examine differences in corporate governance as one of these determinants. However, this literature almost entirely neglects the role of board level employee representation (BLER), despite the fact that this form of ‘stakeholder governance’ is widespread in Europe. This paper addresses this gap in the literature by examining the relationship between BLER and tax avoidance at the company level. Two mechanisms are identified through which BLER might influence corporate tax behavior: 1) reduction in agency costs through monitoring and 2) the voting power of workers as board members to enter into coalitions with management and/or shareholders. Based on a sample of 2343 European listed companies between 2012 and 2017, this paper shows that companies with BLER have a higher effective tax rate (ETR) than companies without workers on the board. The analysis suggests that the ability to form coalitions through voting power is a more significant channel for influencing tax behavior than the monitoring mechanism. The policy implications are that governments should consider ‘stakeholder governance’ such as BLER as one measure supporting their efforts to combat tax avoidance.

The Effect of Shareholder Scrutiny on Corporate Tax Behavior: Evidence from Shareholder Tax Litigation

This study examines the effect of shareholder scrutiny of tax issues on corporate tax behavior. Specifically, we examine the factors associated with receiving shareholder tax litigation and the effect of such litigation on the future tax behavior of both the sued firm and its peers. We find shareholder tax litigation is more likely when firms exhibit higher levels of tax avoidance and greater tax uncertainty. Further, sued firms decrease tax avoidance activities (increasing their cash and GAAP ETRs and reducing the likelihood of extreme tax avoidance) after the suit. Finally, we find a spillover effect from shareholder scrutiny over tax issues. That is, treatment firms from the same industry as sued firms increase their cash and GAAP ETRs and decrease their UTBs and instances of extreme tax avoidance relative to control firms after the sued firm’s shareholder tax litigation, and results are strongest where theory predicts results to be concentrated.

Negative Interest Rates and Corporate Tax Behavior in Banks

This study examines the impact of negative interest rate (NIR) regimes on corporate tax behavior. We argue that NIRs actas a de-facto taxlevied by central banks and investigate how this ‘tax’ affects banks’ corporate tax planning. Using a sample of domestic banks in OECD countries and a difference-in-difference research design, we find that banks affected by negative interest rate policies exhibitan increase in tax planning following the adoption of NIR, compared to unaffected banks. We document that the introduction of NIRsis associated with a 2.3 to 2.6 percentage point decrease in GAAP ETRand that the effects of NIRs are more pronounced in banks with a lower distance to default or lower reserves, and in countries with lower levels of tax enforcement or lower levels of trust in the government. Collectively, our results suggest that NIRs lead banks to increase tax planning as a funding source.

Reputational Risk and Corporate Tax Planning

Corporate tax behavior has recently received considerable public interest, and anecdotal evidence suggests that firms are increasingly concerned about the reputational risk of tax planning. Using RepRisk data to capture firms’ reputational risk due to public scrutiny, this study examines the relationship between reputational risk and corporate tax planning. If managers anticipate higher costs of tax planning in response to higher reputational risk, firms might adjust their tax behavior. My results suggest that firms initially react to more public scrutiny and report higher GAAP effective tax rates. However, this association reverses once public scrutiny decays, suggesting that firms make rather superficial changes of their tax behavior in response to public pressure.

Country Portfolio and Taxation: Evidence from Japan

This study investigates the conditions under which host country portfolios are more likely to regularize corporate tax behavior. We use a sample comprising data on Japanese multinationals covering 2004 to 2014 to examine the relationship between foreign direct investment (FDI) host country portfolios and tax avoidance from the perspectives of investor protection and ethical standards. Our multivariate regression results show that the number of countries with strong investor protection/high ethical standards in the FDI host country portfolio is negatively related to tax avoidance. We also find that the effect of investor protection/ethical standards is less pronounced when the degree of indulgence is high. Further analyses show that the relationships we find are affected by disclosure requirements, local regulations, and accounting standards. These findings remain unchanged after several sensitivity checks. Overall, this study contributes to the business ethics literature by showing that FDI host country investor protection and ethical standards are external monitoring mechanisms for mitigating tax avoidance by multinationals.

A Real Option Approach to Sustainable Corporate Tax Behavior

Aggressive tax planning has become a sustainability problem, as governments have to cope with less tax revenue, which is crucial for investments in sustainable development goals. The OECD and the EU authorities have taken several initiatives against aggressive tax planning, such as the Action Plan against BEPS. However, these initiatives lack effectiveness, and aggressive tax planning is still omnipresent. We analyze the fight against aggressive corporate tax planning from a Real Option Theory perspective, in order to find an explanation for the difficult shift of companies’ aggressive tax planning strategies to more sustainable tax behavior. The Real Option Theory shows that, as long as the option to ‘delay’ the investment in sustainable tax behavior has too much value because the benefits of such investment are uncertain, companies will wait. Based on this new understanding, we suggest additional public policy interventions against aggressive tax planning. These interventions aim directly at reducing this real option value (of waiting).

Directors with foreign experience and corporate tax avoidance

Using a large sample of hand-collected directors' foreign experience data for Chinese listed companies from 2001 to 2016, we examine the impact of directors with foreign experience on corporate tax avoidance. We find a significantly negative association between directors with foreign experience and tax avoidance, suggesting that these directors can help constrain their firms' tax aggressiveness. The result is robust to Heckman two-stage analysis, instrumental variable approach, inclusion of potential omitted variables, change analysis, and alternative tax avoidance measures. Further analyses reveal that reputation concerns and CSR awareness are potential channels through which returnee directors affect corporate tax avoidance. The negative relation between directors with foreign experience and tax avoidance only holds when directors' foreign experiences are derived from countries or regions with higher investor protections. Non-independent directors with foreign experience have larger impacts on corporate tax avoidance than independent directors, and the effect is more pronounced when directors with foreign experience sit on audit committees. Directors' working and studying experiences both have important impacts on corporate tax avoidance. The result also suggests that the negative relation between directors with foreign experience and tax avoidance is more pronounced in non-state-owned firms. Overall, the findings suggest that directors' foreign experience matters for corporate tax behavior in emerging markets.

Political Risk and Corporate Tax Behavior: Firm-Level Evidence

This study investigates the effect of firm-level political risk on corporate tax behavior. Using a novel, firm-level measure of political risk, we find that firms delay tax avoidance investments when facing high political uncertainty, consistent with the implications of the real options theory. In addition, we find that the main effect is more pronounced in firms with greater flexibility to adjust tax positions and firms that are more politically sensitive. Further analyses show that firms with high political risk are associated with less tax planning and consulting fees, less foreign income designated as permanently reinvested earnings, and more lobbying activities. Our findings suggest that the lost tax savings can be a specific channel through which political risk affects shareholder values.

Is Corporate Tax Aggressiveness a Reputation Threat? Corporate Accountability, Corporate Social Responsibility, and Corporate Tax Behavior

In this paper, we consider the relationships among corporate accountability, reputation, and tax behavior as a corporate social responsibility issue. As part of our investigation, we provide empirical examples of corporate reputation and corporate tax behaviors using a sample of large, U.S.-based multinational companies. In addition, we utilize corporate tax controversies to illustrate possibilities for aggressive corporate tax behaviors of high-profile multinationals to become a reputation threat. Finally, we consider whether reputation serves as an accountability mechanism for corporate tax behaviors among other mechanisms for holding firms accountable for corporate tax behaviors. Our conceptual work points to a complicated relationship among shareholder, stakeholder, and civic responsibilities in the development and execution of firm’s corporate tax strategies. Building on those insights, our empirical illustration considers corporate reputation data alongside data which reflects corporate tax behavior. Based on this work, we find no clear trend or pattern indicating that reputation is associated with or affected by certain types of corporate tax behaviors. That is, our exploratory empirical illustration suggests that corporate tax behavior does not produce broad reputational consequences that would motivate a change in firm behavior. Drawing from celebrity and strategic silence research, we then suggest that reputation may not be a well-functioning mechanism for holding corporations to account for contributing their fair share of the resources used by government for the benefit of society and offer-related theoretical insights.

The Impact of Firm Characteristics on Corporate Tax Aggressiveness: A Study on Malaysian Public Listed Companies

The importance of taxes to governments worldwide is undeniable. Governments depend on their tax revenues, especially in ensuring sufficient provisions of public amenities to the society. However, their coffers are unceasingly threatened by tax aggressive behaviors, or aggressive actions to reduce tax burdens, especially by companies. Considering that the Malaysian government is highly reliant on its tax revenues, particularly its corporate income tax collections, this study’s purpose is to examine the impact of firm characteristics on the tax aggressiveness level of public listed companies in this country. This study uses fixed-effects panel regression analysis on 182 companies listed on the Main Market of Bursa Malaysia for the consecutive period from 2010 to 2012. The results identify that firm size, debt intensity, capital intensity, growth rate, and profitability have significant impacts on the level of tax aggressiveness of the companies tested. These findings imply that corporate tax behavior is indeed influenced by the companies’ very own characteristics. Therefore, this study’s findings compellingly suggest that firm characteristics should be adopted as a means in assessing the tax aggressive tendency of Malaysian corporate taxpayers.