Measures Of Tax Avoidance Research Articles

Financial Market Development and Firm Investment in Tax Avoidance: Evidence from Credit Default Swap Market

Lenders reduce their monitoring efforts after hedging their credit risk exposure through credit default swap (CDS) contracts, which are akin to insurance against borrowers’ adverse credit events. In this study, we examine whether, upon observing the reduced lender monitoring following CDS trading, shareholders demand that borrowing firms invest in more aggressive tax planning strategies, which were previously constrained by risk-averse lenders. Using a difference-in-differences design that exploits the variation in timing of the inception of CDS trading, we document that borrowers exhibit greater tax avoidance after the inception of CDS trading. Consistent with shareholders stepping up their demands post-CDS, we find that the increase in tax avoidance is stronger for (i) firms with more powerful and influential shareholders, as measured by dedicated institutional investors, (ii) firms with stronger shareholder defenders, as measured by board independence and board size, and (iii) firms with more strategic default options. We also find that borrowers with higher levels of tax avoidance are less likely to file for bankruptcy in the future. Our findings are robust to a battery of sensitivity checks, including controlling for cost of debt and endogeneity, as well as using alternative measures of tax avoidance.

How U.S. GAAP Distorts the Effective Tax Rate As a Measure of Tax Avoidance

Many studies use GAAP effective tax rates (ETR) as proxies for tax avoidance and rely on the maintained assumption that very low (high) ETRs represent the greatest (least) tax avoidance. We provide large-sample empirical evidence on how well ETRs capture cross-sectional differences in tax avoidance. Using a sample of 6,789 income tax footnote disclosures from 2008 through 2016, we document that factors largely unrelated to tax avoidance explain most of the deviation from the statutory tax rate for ETRs below 5% and above 40%. For example, factors associated with firm performance comprise over 50 percent of the deviation for ETRs below 5% and 20 percent for ETRs above 40%. We also examine alternative tax avoidance measures and find the measure proposed by Henry and Sansing (2018) best reflects expected changes in tax avoidance across its distribution. Our findings inform researchers about factors unrelated to tax avoidance that drive significant deviations in ETRs from the statutory tax rate, which is of increasing importance as the number of studies examining the consequences of tax avoidance grows.

How Tax Enforcement Disparately Affects Domestic Corporations Around the World

Global tax enforcement has received increased attention since the Financial Crisis, with much stated focus on curbing perceived harmful tax practices of multinational entities. Yet multinationals can avoid tax in multiple countries whereas domestic firms cannot. We therefore examine whether there is a differential relation between changes in enforcement spending and the tax avoidance of domestic versus multinational entities. Using OECD data on 47 countries from 2005 to 2013, we find increases in home-country enforcement spending are related to less firm-level tax avoidance for domestic firms relative to multinational entities. Although we find no differential relation between changes in tax enforcement and home-country tax avoidance between multinational and domestic firms, multinationals increase their tax avoidance in foreign countries when home-country enforcement increases, which allows them to maintain a consistent level of worldwide tax avoidance. Results are robust to multiple measures of tax enforcement and avoidance across multiple countries and databases.

Corporate tax avoidance: data truncation and loss firms

Loss firms are an economically significant and growing segment of the population of publicly traded corporations. Relatively little is known about the tax positions of loss firms because the firms are typically dropped from tax avoidance studies. We develop a new measure of corporate cash tax avoidance that is meaningful for all observations and reflects the extent to which a firm is tax-favored. We examine the extent to which inferences about corporate tax avoidance over the past twenty-seven years change when we examine the full population of firms, as opposed to a profitable and/or taxable subsample. In contrast to prior research findings, our results suggest that on average firms are tax-disfavored, by which we mean cash taxes paid exceed the product of the firm’s pre-tax book income and the statutory tax rate. In addition, many industries that appear to be tax-favored in profitable subsamples are tax-disfavored when the entire population is examined. We also find that the extent to which firms are tax-disfavored is increasing over time, and that domestic firms are more tax-disfavored than multinationals.

The Potential of Tax Surprises to Affect Measures of Tax Avoidance and Researchers' Inferences

ABSTRACTWhile not explicitly stated, many tax avoidance studies seek to investigate tax avoidance that is the result of firms' deliberate actions. However, measures of firms' tax avoidance can also be affected by factors outside the firms' control—tax surprises. This study examines potential complications caused by tax surprises when measuring tax avoidance by focusing on one specific type of surprise tax savings—the unanticipated tax benefit from employees' exercise of stock options. Because the cash effective tax rate (ETR) includes the benefits of this tax surprise, the cash ETR mismeasures firms' deliberate tax avoidance. The analyses conducted show this mismeasurement is material and can lead to both Type I and Type II errors in studies of deliberate tax avoidance. Suggestions to aid researchers in mitigating these concerns are also provided.

Effects of IFRS adoption on tax avoidance

ABSTRACT This study investigates the association between mandatory International Financial Reporting Standards (IFRS) adoption and corporate tax avoidance. In this study, tax avoidance is defined as a reduction in the effective corporate income tax rate through tax planning activities, whether these are legal, questionable, or even illegal. Three measures of tax avoidance are used and factors at the country and firm level (that have already been associated with tax avoidance in prior research) are controlled. Using samples that range from 9,389 to 15,423 publicly-traded companies from 35 countries, covering 1999 to 2014, it is found that IFRS adoption is associated with higher levels of corporate tax avoidance, even when the level of book-tax conformity required in the countries and the volume of accruals are controlled, both of which are considered potential determinants of this relationship. Furthermore, the results suggest that after IFRS adoption, firms in higher book-tax conformity environments engage more in tax avoidance than firms in lower book-tax conformity environments. It is also identified that engagement in tax avoidance after IFRS adoption derives not only from accruals management, but also from practices that do not involve accruals. The main conclusion is that companies engage more in tax avoidance after mandatory IFRS adoption.

Controlled Foreign Corporation Rules and Cross-Border M&A Activity

We investigate the influence of one main anti tax avoidance measure, controlled foreign corporation (CFC) rules, on cross-border merger and acquisition (M&A) activity on a global scale. Using three different statistical methods and a large M&A data set, we find that CFC rules distort ownership patterns due to a competitive advantage of multinational entities whose parents reside in non-CFC rule countries. First, we show that the probability of being the acquirer of a low-tax target decreases if CFC rules may be applicable to this target’s income. Second, we show that CFC rules distort the acquirer’s location choice of targets. Third, we show that CFC rules negatively affect the probability of being the acquirer in a cross-border M&A. Altogether, this study shows that for affected acquirer countries, CFC rules lead to less M&A activity in low-tax countries because profit shifting seems to be less feasible. This behavior change could result in an increase in global corporate tax revenue.

과세소득 추정의 측정오차 및 조세회피 측정치의 기업규모별․업종별 차이

과세소득 추정의 측정오차 및 조세회피 측정치의 기업규모별․업종별 차이

A Reexamination of U.S. Corporate Tax Avoidance Over the Past Twenty-Five Years: Estimating Corporate Tax Avoidance with Accounting-Based Measures

Dyreng et al. (2017) find that the effective tax rates for both foreign and domestic corporations have steadily declined over the past quarter century. However, contrary to conventional wisdom, the authors also find that U.S. multinational corporations do not have a tax-based cost advantage relative to their domestic counterparts. We investigate this unexpected finding by reexamining corporate income taxes over the past quarter century employing an alternative tax avoidance measure developed by Henry and Sansing (2014). The authors measure addresses both sample selection bias and measurement error that exists when using income as the denominator when calculating effective tax rates. Using the Henry and Sansing (2014) measure of tax avoidance, we find that U.S. multinational corporations do have a tax-based cost advantage relative to their domestic counterparts. Thus, sample selection bias is a plausible explanation for the unexpected tax-based cost advantage of US domestic firms reported in prior research.

Sustainability Performance and Tax Avoidance Disentangling the Effects of Operational and Management Sustainability Performance

This paper provides an explanation for the previously mixed findings on the relationship between corporate sustainability performance (CSP) and corporate tax avoidance by disentangling sustainability performance into operational and management sustainability performance. The results from multivariate regression analyses for a sample of 4,449 U.S. firm-year observations reveal a positive relationship between management sustainability performance and tax avoidance and a negative relationship between operational sustainability performance and tax avoidance. The results are robust across the environmental and social dimensions of sustainability and various measures of tax avoidance. Overall, the study provides novel insights into the association between CSP and corporate tax avoidance.

Who Invests in Corporate Tax Avoiders?

We use detailed data on individual investors’ stock holdings to investigate whether corporate tax avoidance affects the willingness of individual investors to own stock. Consistent with corporate tax avoidance increasing both the perceived risk of owning stock and the costs of processing financial information, we provide robust evidence that individual investors own less stock of firms with low effective tax rates, our proxy for corporate tax avoidance. We then examine whether investor sophistication and investment strategies impact individuals’ willingness to own stock in firms with low effective tax rates. Our results suggest that more sophisticated investors and investors with shorter investment horizons own more stock in high tax avoidance firms, while more conservative investors own less. We also demonstrate that individual investors that own more stock in firms with low effective tax rates earn significantly higher abnormal stock returns than individual investors that own less such stock. Our results are robust to numerous control variables (including financial statement disclosure quality, as investigated in Lawrence 2013) and to an alternative measure of corporate tax avoidance. Overall, our findings suggest that less sophisticated and more conservative investors are less willing to own stock in corporate tax avoiders and thus, are at a disadvantage relative to other individual investors.

Does Tax Risk Affect Investor Valuation of Tax Avoidance?

We examine how investors value tax avoidance (measured as the level of cash effective tax rates [ETRs]) and tax risk (measured as the volatility of cash ETRs), and how these constructs interact to influence firm value. Our results suggest that investors positively value tax avoidance but negatively value tax risk and, most importantly, that greater tax risk moderates the positive valuation of tax avoidance. In additional analyses, we find that contemporaneous measures of tax avoidance and tax risk provide insight into future tax cash flows and that our results hold using GAAP ETR-based measures of tax avoidance and tax risk. Finally, our results are robust to a battery of sensitivity checks including controlling for idiosyncratic and systematic risk, the cost of equity capital, and unrecognized tax benefits in the post-FIN 48 period, among others. Broadly, our findings provide new evidence on how taxes affect firm value and suggest that tax avoidance and tax risk should be considered jointly rather than in isolation.

How Do Effective Tax Rates Vary Across Firms and Time? Insight from Effective Tax Rate Reconciliations

Effective tax rates (ETRs) are often used to compare tax avoidance across firms and time. Using firms’ detailed tax footnote data, we find that the effect of valuation allowances (VA) related to prior-period losses biases GAAP ETRs. This downward bias explains almost all of the downward trend in domestic firms’ ETRs over the last 20 years. We also find that VAs explain cross-sectional differences in ETRs for both domestic and multinational firms. We show this bias extends to cash ETRs and the Henry and Sansing (2018) tax avoidance measure. We develop a methodology for substantially reducing the bias in both time-series and cross-sectional analyses of cash and GAAP ETRs. Overall, our results suggest firms’ loss histories and GAAP rules influence inferences from tax avoidance proxies.

Credit Default Swaps and Borrower Tax Avoidance

This study investigates the effect of the debtor-creditor relationship on firms’ tax planning decisions. We explore the introduction of credit default swaps as a shock to the debtor-creditor relationship that potentially reduces the non-tax costs of tax avoidance, thus increasing the level of tax avoidance. Using a differences-in-differences regression, we find that borrowing firms significantly increase their level of tax avoidance when there are credit default swaps trading on their debts. This effect is more pronounced when the top managers’ compensation schemes are structured to be better aligned with risk-chasing shareholders, when managers are more insulated from takeover pressures, and when the outstanding shares of borrowing firms are more intensively held by institutional investors. Our findings are robust to various measures of tax avoidance and alternative research designs.

Macroeconomic Effects of Aggregate Corporate Tax Avoidance: A Cross-Country Analysis

We re-examine the relation between corporate taxes and future macroeconomic growth. Prior studies in the economics literature present contradictory evidence on this relation. We argue that the mixed evidence in the prior literature is at least partly due to the use of statutory corporate tax rates which ignore the complexity of tax credits, tax exemptions, tax deductions, tax enforcement and firms’ tax planning. Consistent with these concerns, we document that the relation between future economic growth and statutory corporate tax rates are sensitive to choice of economic growth proxies, model specification and control variables. We propose an alternative tax burden measure that aggregate cash effective tax rates of listed firms, a common measure of firm-level tax avoidance, and find a strong and robust positive relation between country-level tax avoidance and future macroeconomic growth. This finding is further supported by a positive relationship between firm-level corporate tax avoidance and future firm-level investment. In cross-sectional tests, the positive relationship between aggregate corporate tax avoidance and future economic growth appears to be driven by countries with higher levels of government corruption and with higher levels of corporate tax planning as opposed to government granted tax incentives.

Cross-Country Evidence on the Role of Independent Media in Constraining Corporate Tax Aggressiveness

Using an international sample of firms from 32 countries, we study the relation between media independence and corporate tax aggressiveness. We measure media independence by the extent of private ownership and competition in the media industry. Using an indicator variable for tax aggressiveness when the firm’s corporate tax avoidance measure is within the top quartile of each country-industry combination, we find strong evidence that media independence is associated with a lower likelihood of tax aggressiveness, after controlling for other institutional determinants, including home-country tax system characteristics. We also find that the effect of media independence is more pronounced when the legal environment is weaker, and when the information environment is less transparent. We contribute to the business ethics literature by documenting the role of independent media as an external monitoring mechanism in constraining corporate tax aggressiveness.

Transparency, Information Shocks, and Tax Avoidance

This study helps provide clarity to the prior mixed findings on the association between the transparency of the financial information environment and tax avoidance by studying the effect that transparency has on tax avoidance in a cross-country sample through aggregate - and firm-level tests. By using the adoption of IFRS and the initial enforcement of insider trading laws around the world as exogenous shocks to transparency, this study addresses empirical concerns regarding endogeneity and reverse causality not fully addressed in prior research. Results using firm- and country-level (aggregate) measures of transparency and tax avoidance show that countries and firms with greater levels of transparency exhibit lower levels of tax avoidance and that the effect of country-level transparency is incremental to firm-level transparency. Results of difference-in-difference tests using the adoption of IFRS as an exogenous shock to financial transparency (while also controlling for other, potentially confounding changes around IFRS adoption) provide further evidence that transparency has a statistically and economically significant effect on tax avoidance. Additional tests using the initial enforcement of insider trading laws as another exogenous shock as well as tests that address potential correlated but omitted variables show consistent results. These findings suggest that financial transparency is an important tool which regulators can use in battling tax avoidance and that laws passed around the time of IFRS adoption to ensure that firms did not have an increase in tax liability may have been less than effective due to the corresponding effect of IFRS adoption on transparency.

Are Private Firms Really More Tax Aggressive than Public Firms?

This paper tests the notion that private firms are more tax aggressive than public firms. Tax avoidance measures, e.g. effective tax rates, cannot be used to compare private and public firms when private and public firms have different levels of importance on financial accounting earnings (Hanlon and Heitzman 2010). To disentangle financial reporting incentives from tax aggressiveness, I use the fact that European groups must prepare two sets of financial statements: first, group statements (consolidated), which provide information to investors, and, second, individual statements (unconsolidated), which are used for legal purposes, but not to inform investors. Since in individual statements financial reporting incentives do not vary between public and private firms, I use these effective tax rates to compare private and public firms. My findings show that public, not private, firms are more tax aggressive, as the effective tax rates of public firms are lower in individual and group statements. (author's abstract)

The Effect of Corporate Tax Avoidance on the Cost of Equity

ABSTRACT Based on Lambert, Leuz, and Verrecchia's (2007) derivation of the cost of equity capital in terms of expected cash flows, we generate a testable hypothesis that relates tax avoidance to a firm's cost of equity capital. Using three broad measures of tax avoidance—book-tax differences, permanent book-tax differences, and long-run cash effective tax rates—to test our hypothesis, we find that the cost of equity is lower for tax-avoiding firms. This effect is stronger for firms with better outside monitoring, firms that likely realize higher marginal benefits from tax savings, and firms with higher information quality. Overall, our results suggest that equity investors generally require a lower expected rate of return due to the positive cash flow effects of corporate tax avoidance. JEL Classifications: G32; H26; M41.

Is Tax Avoidance Related to Firm Risk?

ABSTRACT We test whether tax avoidance strategies are associated with greater firm risk. We find that low tax rates tend to be more persistent than high tax rates and that measures of tax avoidance commonly used in the literature are generally not associated with either future tax rate volatility or future overall firm risk. Our evidence suggests that, on average, corporate tax avoidance is accomplished using strategies that are persistent and do not increase firm risk. We also find that the volatility of cash tax rates is associated with future stock volatility, suggesting that tax rate volatility and overall firm risk are related. JEL Classifications: M41.