Greater Tax Avoidance Research Articles

Director and officer liability and corporate tax avoidance

AbstractWe use the unique nature of the director and officer liability protection law applicable to Nevada incorporated firms to study how liability protection is related to corporate tax avoidance. We find that firms incorporated in Nevada avoid 32% more federal corporate tax as a fraction of total assets than firms incorporated in Delaware, and 40% more than firms incorporated in other states. Nevada‐incorporated firms have a 15% lower cash effective tax rate and an 8% lower GAAP ETR. The results are robust to various specifications including instrumental variable and matching approaches. Greater tax avoidance is also associated with lower payouts to shareholders for Nevada‐incorporated firms. The findings are consistent with theories about the complementarity of managerial diversion and tax avoidance for firms with poor monitoring, and they demonstrate how increases in liability protection lead to the unintended consequence of greater firm tax avoidance.

CEO risk-seeking and corporate tax avoidance: Evidence from pilot CEOs

This paper investigates whether executives with risk-seeking tendencies engage in greater tax avoidance and find that CEOs who possess private pilot licenses (our proxy for risk-seeking) significantly reduce firm's cash effective tax rate. Risk-seeking has a considerably stronger effect on tax avoidance compared with other commonly studied executive characteristics, including overconfidence and ability. Cross-sectional tests reveal that the baseline results are not sensitive to managerial remuneration incentives, suggesting that intrinsic incentives derived from endowed traits are not easily moderated by extrinsic motivation from compensation contracts. Additionally, we find that managerial oversight helps channel CEOs risk-seeking tendencies towards value creating tax planning endeavors. Further tests reveal that risk-seeking CEOs reduce effective tax rates only when they can engage in complex, risky, and intricate income shifting strategies. Taken together, our paper highlights the role and contexts in which risk-seeking tendencies influence corporate tax planning activities.

The minimum wage and corporate tax avoidance

This paper investigates the impact of the minimum wage (MW) on corporate tax avoidance. By exploiting heterogeneity in the MW level across cities and over time in China, we find that increases in the MW are associated with greater tax avoidance by firms. Our results are robust to the consideration of a sample of contiguous firms in two adjacent cities subject to different MWs, and a difference-in-differences research design that exploits the enactment of the Labor Contract Law in 2008 as an exogenous shock to the MW. In cross-sectional analyses, we find that the positive impact of MWs on tax avoidance is more pronounced for firms with higher labour intensity, greater financial constraints, and less product market power and in regions with laxer enforcement. Our paper suggests that the MW policy imposes substantial, albeit likely unintended, externalities on corporate tax. Our findings can help inform policymakers of more potential implications of MW policies.

David versus Goliath: The Relation between Auditor Size and Audit Quality for U.K. Private Firms

We examine the relation between auditor size and audit quality for a sample of U.K. private firms. Private firms prioritize tax considerations over reducing information asymmetry in their financial reporting. We find that Big 4’s private clients exhibit higher levels of discretionary accruals and lower precision of accrual estimates than non-Big 4’s private clients. Although Big 4 auditors are less tolerant of income-increasing earnings management, they leave more room for downward earnings management and their private clients are able to engage in greater tax avoidance. These results are stronger for standalone firms than for business groups as the latter’s greater demand for stakeholder communication motivates Big 4 auditors to increase audit quality. Collectively, our evidence suggests that Big 4 auditors adjust audit quality in a more competitive segment of the audit market where client firms generally perceive the benefit from tax minimization to outweigh the cost of reduced earnings informativeness.

CEO Endowed Trait and Corporate Tax Avoidance: Evidence from Pilot CEOs

This paper investigates whether executives with thrill-seeking tendencies engage in greater tax avoidance. Our results show a strong negative association between CEO thrill-seeking and a firm’s cash effective tax rate. We further find that thrill-seeking has a considerably stronger effect on tax avoidance compared with other commonly studied executive characteristics, including overconfidence and ability. Cross-sectional tests reveal that the baseline results are not sensitive to managerial remuneration incentives, suggesting that intrinsic incentives derived from endowed traits are not easily moderated by extrinsic motivation from compensation contracts. Furthermore, we find that the baseline effect only holds in settings with strong institutional oversight, suggesting that institutional monitoring helps channel managerial thrill-seeking tendencies towards value creating tax planning endeavors. Additional analysis reveals that thrill-seeking CEOs reduce effective tax rates only when they are subject to institutional oversight and when they have the ability to engage in complex, risky, and intricate income shifting strategies. Taken together, our paper highlights the role and contexts in which thrill-seeking tendencies influence corporate tax planning activities.

Does the Disclosure of Unrecognized Tax Benefits Affect Investor Uncertainty?

We examine whether the disclosure of tax-related uncertainty through unrecognized tax benefits (UTBs) resolves or exacerbates investors’ uncertainty about firm value based on evidence from investor trading behavior and information asymmetry around the time of the disclosure. We find that current year UTB additions are associated with reduced trading activity around the release of the 10-K and wider bid-ask spreads in the days following the 10-K release. We find no evidence of an association between UTB additions and contemporaneous abnormal returns. Our results suggest that UTB additions increase investor uncertainty and investors impound the information contained in UTBs into prices with a delay. Moreover, we find that our results are concentrated in firms that engage in greater tax avoidance and in firms with poorer financial reporting quality. We also find that the association between UTB additions and information asymmetry is concentrated among firms with low institutional ownership. Taken together, our results suggest that UTB disclosures increase short-term investor uncertainty about future firm value, which undermines the FASB’s goal of increasing the relevance and transparency of accounting for uncertain tax positions.

Does Corporate Culture Impact Tax Behavior: Machine Learning Approach

This study investigates whether corporate culture of a firm impacts its tax shelter behavior. We use novel machine learning methodology to measure corporate culture of a firm. The analyses show that firms with stronger corporate culture are more likely to engage in tax shelter behavior and extent of such behavior is greater in these firms. The findings also suggest that firms with stronger corporate culture engage in greater tax avoidance, which is a less controversial corporate behavior compared to tax shelter activities. The results continue to hold when we implement battery of tests to address endogeneity issues (e.g., two-stage least squares methodology and difference-in-difference analysis). Finally, we determine that engaging in tax shelter behavior as a result of stronger corporate culture increases a firm’s after-tax earnings in future periods.

Determinants and Consequences of Tax-Related Key Audit Matters

This study examines the determinants and unintended consequences of tax-related key audit matters (KAMs). We argue it is important to examine constructs specifically related to KAM topics to draw valid inferences about expanded audit reporting. Tax KAMs provide this opportunity because tax expense is material to most firms, there is substantial risk in the tax function, and tax KAMs are prevalent and discuss a range of issues. Consistent with tax complexity increasing the difficulty of auditing tax expense, we find that firms with greater tax avoidance, greater tax risk, and larger deferred tax asset balances with greater estimation uncertainty are more likely to receive a tax KAM. In consequences analyses, we find that firms that stop receiving tax KAMs increase their future (but not concurrent) purchases of auditor-provided tax services, consistent with economic bond incentives threatening auditor independence. Firms that stop receiving tax KAMs also increase tax avoidance in subsequent years.

Tax avoidance: do board gender diversity and sustainability performance make a difference?

PurposeThis study aims to investigate whether board gender diversity and sustainability performance influence tax avoidance.Design/methodology/approachThe study is based on a sample consisting of 300 UK firms over the 2005-2017 period. This study is motivated by structural equations and system models that specify both a direct and an indirect link between board gender diversity and tax avoidance.FindingsThe results show that the level of tax avoidance decrease when the level of women on the board increase. Therefore, we find that sustainability performance is generally associated with greater tax avoidance. In combination, the results suggest that board gender diversity and sustainability performance play a significant role in corporate tax avoidance.Practical implicationsThe findings may be of interest to the academic researchers, investors and regulators. For academic researchers, it is interested in discovering board gender diversity, sustainability performance and tax avoidance. For investors, the results show that the existence of female directors on the board reduces the tax avoidance. For regulators, the results advise the worldwide policy makers to give the importance of female roles to improve the engagement firms in sustainability reporting.Originality/valueThis study extends the existing literature by examining the mediating effect of sustainability performance on the relationship between board gender and tax avoidance in the UK context.

Management Compensation, Gender Diversification, and Executive Preferences on Tax Avoidance of IDX Manufacturing Companies

This study aims to analyse the effect of management compensation, gender diversification, and executive preferences on tax avoidance practices in Indonesia Stock Exchange (IDX). Conceptually, this study uses mediating variables of executive gender diversification and executive preferences in the relationship between management compensation and tax avoidance. This study uses balanced panel data with a total of 404 observations from manufacturing companies listed on the Indonesia Stock Exchange in the 2015-2018 period. The results showed a negative assessment of management compensation on tax avoidance. However, further examination revealed that management compensation will positively influence tax avoidance if compensation is given to the board of directors who have gender diversification characteristics in the composition of their members indicated by at least one female director on the board of directors. Lastly, the greater the management compensation given to executives who have risk taker characteristics will also make directors to do greater tax avoidance.

TAX AVOIDANCE, RELATED PARTY TRANSACTIONS, CORPORATE GOVERNANCE AND THE CORPORATE CASH DIVIDEND POLICY

This study aims to investigate the relationship between tax avoidance, related party transactions and the corporate dividend policy. Furthermore, this study will also investigate the moderating effects of the implementation of Corporate Governance (CG) on the relationship between tax avoidance, Related Party Transactions (RPT) and corporate dividend policies. Our sample covers companies listed on the Indonesian Stock Exchange during 2011-2014. The results provide moderate support for the proposed hypotheses. First, the greater tax avoidance that a company makes will increase the size of the firm's RPT. Second, the higher that the company's RPT is, this will lower the company's cash dividend payout rate. Third, the greater the tax avoidance is, the lower the company's cash dividend payout rate will be, which is done through a related party transaction.Fourth, the impact of the implementation of strong CG will weaken the positive relationship between corporate tax avoidance and the company’s RPT size, strengthen the negative relationship between the RPT’s size and the cash dividend payout policy of the firm, and strengthen the negative relationship between the company’s tax avoidance and the company's cash dividend payout policy which is mediated by the company’s RPT. This study makes three contributions. First, this study shows an indirect relationship between tax avoidance and cash dividend payments, mediated by RPT. Second, this study tries to examine the effect of CG’s moderation on the relationship between tax avoidance and RPT, as well as the effect of CG’s moderation on the relationship between tax avoidance and cash dividend payments, mediated by RPT. Third, this study developed RPT measurements by looking at the RPT’s components more specifically (looking at components of transactions outside of the main business of the company - the "others" component).

Can Paying Taxes Substitute for Corporate Social Responsibility? Evidence from Socially Responsible Investment Funds

We examine whether corporate tax avoidance impacts the investment decisions of socially responsible investment (SRI) mutual funds. After controlling for corporate social responsibility (CSR) constructs, we find that investment by SRI funds is positively associated with paying corporate taxes. Whereas corporate tax avoidance does not affect SRI fund investment in firms with a strong CSR reputation, greater tax avoidance leads to significantly less SRI fund investment in firms as their CSR reputation weakens. These results hold after accounting for selection bias, controlling for earnings management and managerial entrenchment, and performing several robustness checks. Our findings suggest that socially responsible investors consider corporate tax avoidance an important aspect of CSR and they are consistent with recent findings in the literature that corporate insiders view paying taxes and CSR as substitutes.

Does the Onset of CDS Trading Increase Tax Avoidance?

Credit default swaps (CDS), provide protection against borrowers’ adverse credit events, potentially reducing lenders’ incentives to diligently monitor their creditors. In this study, we examine whether this reduction in lender monitoring induces greater corporate tax avoidance by borrowers. Using a difference-in-differences approach that exploits the variation in dates of the onset of CDS trading, we document that borrowers exhibit greater tax avoidance following the onset of CDS trading. Additionally, we find the observed effect to be stronger when lenders’ reputation costs in the event of a borrower default are lower. The effect is also more pronounced when ex-ante shareholder-manager agency conflicts are greater, suggesting that increased post-CDS tax avoidance is likely an outcome of managerial rent extraction as opposed to asset substitution. Additional analyses reveal that the observed effect is stronger for firms that are informationally opaque and financially constrained. Our study provides the first evidence on a potentially unintended effect of CDS trade initiation on corporate tax policies.

The Role of Managerial Ability in Corporate Tax Avoidance

Most prior studies model tax avoidance as a function of firm-level characteristics and do not consider how individual executive characteristics affect tax avoidance. This paper investigates whether executives with superior ability to efficiently manage corporate resources engage in greater tax avoidance. Our results show that moving from the lower to upper quartile of managerial ability is associated with a 3.15% (2.50%) reduction in a firm’s one-year (five-year) cash effective tax rate. We examine how higher-ability managers reduce income tax payments and find that they engage in greater state tax planning activities, shift more income to foreign tax havens, make more research and development credit claims, and make greater investments in assets that generate accelerated depreciation deductions. Identifying a manager characteristic related to firms’ tax policy decisions adds to our understanding of the factors that explain the substantial variation in corporate income tax payments across firms. This paper was accepted by Mary Barth, accounting.

The Effects of Regulatory Scrutiny on Tax Avoidance: An Examination of SEC Comment Letters

ABSTRACT This study examines the tax avoidance behavior of firms prior to the issuance, and following the resolution, of SEC tax comment letters. We find that firms that appear to engage in greater tax avoidance are more likely to receive a tax-related SEC comment letter. We also find that firms receiving a tax-related SEC comment letter, relative to firms receiving a non-tax comment letter, subsequently decrease their tax avoidance behavior consistent with an increase in expected tax costs. Additionally, we document evidence consistent with other firms that do not receive a comment letter reacting to multiple publicly disclosed tax-related comment letters within their industry by increasing their reported GAAP ETR, consistent with an indirect effect of regulatory scrutiny on certain types of tax avoidance.

Ex Ante Severance Agreements and Tax Avoidance

We study whether and how CEO severance contracts affect tax avoidance behavior. We examine 13,888 firm year observations for S&P1500 firms between 1992 and 2014, including 11,616 firm-year observations for firms with severance agreements. Using four measures to proxy for tax avoidance activities we find evidence supporting the hypothesis that severance pay is associated with greater tax avoidance. Further analyses show that the effect is more pronounced in firms with weaker corporate governance and firms with less effective monitoring. Our findings suggest that long-term institutional shareholders curtail firm’s tax avoidance activities, likely because tax avoidance might entail excessive risk-taking, facilitate rent extraction and increase information asymmetry.

Quasi-Indexer Ownership and Corporate Tax-Planning

We test the causal effect of quasi-indexers, traditionally viewed as passive institutional owners, on corporate tax planning by employing the discontinuity in quasi-indexer ownership around the Russell 1000/2000 index cutoff. Russell indices are value-weighted, thus firms assigned to the top of Russell 2000 exhibit much higher quasi-indexer holdings than firms assigned to the bottom of Russell 1000 as a result of the large discontinuity in index weights. Using a regression discontinuity design, we find that the higher quasi-indexer ownership at the top of Russell 2000 is associated with lower GAAP and cash effective tax rates and higher book-tax differences. Further, the greater tax avoidance comes from better federal and state tax planning, not from aggressive tax sheltering activities. Our results are robust to an instrumental variable approach and to various robustness checks. Our evidence contributes to the literature on the impact of ownership structure on tax avoidance and extends the new literature re-examining the assumption that quasi-indexers are passive owners.

Product Market Power and Tax Avoidance: Market Leaders, Mimicking Strategies, and Stock Returns

ABSTRACTProduct market power provides firms with comparative advantages through more persistent profitability and insulation from competitive threats. These advantages likely provide firms with the ability to engage in greater tax avoidance. We present evidence consistent with this hypothesis. We also show that firms mimic the tax outcomes of their product market leaders. Among firms with greater product market power and comparatively high cash tax avoidance, we find stock prices to be less informative and that investors require additional compensation for the risks associated with comparatively high cash tax avoidance. Our results survive numerous robustness tests. Overall, our results suggest that industry dynamics, particularly related to a firm's competitive position, play a meaningful role in corporate tax policy.

Does Operational Efficiency Spill Over Onto the Tax Return?

We find managers with greater ability to efficiently utilize firm resources engage in greater tax avoidance. We define managerial ability as a manager’s capacity to “maximize the efficiency of [firm] resources used for revenue-generating purposes” (Demerjian et al. 2012, p.1) and view cash outflows to the taxing authorities as an inefficient utilization of resources. Moving from the lower to upper quartile of managerial ability is associated with a 3.16 (4.39) % reduction in a firm’s one-year (five-year) cash-based effective tax rate. Cross-sectional tests reveal that higherability managers structure investments in RD M41

Tax Avoidance: Does Tax-Specific Industry Expertise Make a Difference?

ABSTRACT This study investigates whether the tax-specific industry expertise of the external audit firm influences its clients' level of tax avoidance. Our results suggest that clients purchasing tax services from their external audit firm engage in greater tax avoidance when their external audit firm is a tax expert. Because the external audit firm potentially influences clients' tax avoidance activities via the provision of tax consulting services and the financial statement audit, we also examine whether the overall expertise (i.e., the combined tax and audit expertise) of the external audit firm is associated with tax avoidance. We find that the external audit firm's overall expertise is generally associated with greater tax avoidance, which suggests that overall experts are able to combine their audit and tax expertise to develop tax strategies that benefit clients from both a tax and financial statement perspective. In combination, our results suggest that the tax-specific industry expertise of the external audit firm plays a significant role in its clients' tax avoidance. Data Availability: Data used in this study are available from public sources identified in the article.