Examining the Association Between Tax Risk and Tax Outcomes PDF Download

Author: Stevanie S. Neuman
Publisher:
ISBN:
Category :
Languages : en
Pages : 61

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Book Description
This study develops and validates an ex-ante measure of firm-specific overall tax risk. We define tax risk as the potential that current actions or activities, or the failure to take actions or pursue activities, will lead to future tax outcomes that are different from expectations. Tax risk arises from the interaction of economic risk and tax law uncertainty. An ex-ante measure of firm-specific tax risk allows us to classify firms as pursuing a more or less risky tax strategy relative to other firms. Our study is important because revenue authorities worldwide have increased their scrutiny of firms engaging in risky tax strategies and greater tax risk can impact the economic performance of firms' investments. Tax practitioners and their clients engage in tax risk management to improve the expected outcomes of firm-specific tax strategies; however, researchers have not measured ex-ante tax risk or its association with tax outcomes. Our results document an association between our measure of tax risk and other measures of firm risk found in both the accounting and finance literatures. We also find a negative association between tax risk and cash effective tax rates, implying that, on average, firms manage tax risk effectively and earn returns (in the form of lower cash taxes paid) for engaging in higher tax risk. Thus, our results contribute to the ongoing discussion of corporate tax avoidance, as well as provide a replicable measure of firm-specific tax risk that researchers can use to examine questions about corporate tax avoidance more broadly.

Author: Stevanie S. Neuman
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Book Description
This study develops an ex-ante measure of firms' overall tax risk, allowing us to classify a firm as pursuing a more or less risky tax strategy relative to other firms, and examines the distribution of tax outcomes associated with levels of tax risk. Our study is important because tax practitioners and firms have begun to focus on managing tax risk to improve the expected outcomes of firms' tax strategies, but researchers have not systematically measured ex-ante tax risk or its association with tax outcomes. Our results indicate that tax risk is negatively associated with future cash effective tax rates; however, the sustainability of a firm's pretax earnings moderates this association. Relative to other firms, firms with sustainable or unsustainable pretax earnings pay significantly higher taxes for an equal increase in tax risk. Our results imply that firms earn returns for tax risk, but that return depends on nontax considerations.

Author: Stevanie S. Neuman
Publisher:
ISBN:
Category :
Languages : en
Pages : 64

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Book Description
This study uses insights from tax practitioners and tax authorities to define and develop an ex-ante estimate of tax risk that is independent of common tax outcomes studied in the literature. Validation tests confirm that our tax risk measure (1) captures the predictable and unpredictable uncertainty inherent in the three sources of tax risk (i.e., economic risk, tax law uncertainty, and inaccurate information processing) and (2) represents a construct different from current academic tax avoidance, tax uncertainty, and general business risk measures. We then use the tax risk measure to answer two research questions. First, we find a significant, negative association between tax risk and future long-run cash effective tax rates. Second, we demonstrate that our tax risk measure explains a substantial portion of unrecognized tax benefits, incremental and relative to measures of information risk, conditional conservatism, unconditional conservatism, and tax avoidance. Our study offers a measure of tax risk that, consistent with Scholes-Wolfson, reflects the tax risk inherent in all business activities, not just tax avoidance activities, has unique industry effects, and contributes to our understanding of the factors that affect tax planning decisions and result in variation in firms' effective tax rates. We enhance future tax research by improving the internal, external, and construct validity of tax risk.

Author: Myron S. Scholes
Publisher:
ISBN: 9781292065571
Category :
Languages : en
Pages : 528

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Book Description
For MBA students and graduates embarking on careers in investment banking, corporate finance, strategy consulting, money management, or venture capital Through integration with traditional MBA topics, Taxes and Business Strategy, Fifth Edition provides a framework for understanding how taxes affect decision-making, asset prices, equilibrium returns, and the financial and operational structure of firms. Teaching and Learning Experience This program presents a better teaching and learning experience-for you and your students: *Use a text from an active author team: All 5 authors actively teach the tax and business strategy course and provide students with relevant examples from both classroom and real-world consulting experience. *Teach students the practical uses for business strategy: Students learn important concepts that can be applied to their own lives. *Reinforce learning by using in-depth analysis: Analysis and explanatory material help students understand, think about, and retain information.

Author: Benjamin Osswald
Publisher:
ISBN:
Category :
Languages : en
Pages : 0

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Book Description
This study examines whether tax risk attenuates the positive association between firms' internal information quality (IIQ) and external information quality (EIQ). Theoretically, higher IIQ allows managers to increase the quality of disclosures to external market participants, which improves EIQ. However, engaging in risky tax planning strategies discourages managers from disclosing information due to the risk of drawing attention from tax authorities (i.e., proprietary costs). I hypothesize and find that the association between IIQ and EIQ is fully attenuated for firms in the highest quintile of tax risk. A structural equation model, using the adoption of Financial Accounting Standards Board Interpretation No. 48 (FIN 48) as an exogenous shock to tax risk, and supplemental tests that account for business-related proprietary costs and uncertainty corroborate my findings. Additional analyses indicate a stronger impact of tax risk when firms face scrutiny either when analysts forecast tax expenses or when the firm is likely to be subject to increase IRS monitoring. I also document that decreased tax accrual quality is one driver for the observed attenuating impact of tax risk on EIQ. Furthermore, my results indicate that managers do not increase tax-related disclosure in response to tax risk when internal information quality is high. In contrast to prior literature, my results indicate that tax risk and not the level of tax planning is this driving factor for the documented relationships. Overall, my results imply that firms with higher IIQ improve EIQ, on average. However, higher tax risk and not the level of tax planning breaks down this link due to the proprietary costs of disclosing risky tax strategies to tax authorities. Additional analyses indicate that the negative association between tax risk appears not to be sensitive to the choice of empirical proxy for tax risk and managerial incentives. The negative impact of tax risk, however, appears to be more pronounced for firms in the financial industry compared to industrial firms and domestic firms compared to multinational firms. These findings illustrate how proprietary costs arising from risky tax planning affect firms' external information environment negatively.

Author: Chen Zhang
Publisher: Springer Nature
ISBN: 9811398291
Category : Law
Languages : en
Pages : 186

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Book Description
This book focuses on corporate sector development in the context of transition economies, such as China. In doing so, the book uses quantitative methods to test several hypotheses that are salient to the Chinese economic situation. Topics covered in the book include the relationship between tax management and firm performance, the extent to which a short-term focus on tax management can lead to long-term vulnerabilities, the impact of government ownership on tax management impact, and the link between the co-evolution of marketization and corruption, and institutional change and tax management. With that the book offers rich empirical evidence to examine tax management, firm performance and corruption in a broad context, while permitting comparison between the Chinese experience and the market economies.

Author: Wayne L. Nesbitt
Publisher:
ISBN:
Category :
Languages : en
Pages : 52

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Book Description
We investigate the relation between tax risk and valuation of a firm's tax avoidance through an analysis of the stock price reaction towards the firms that were exposed through the Luxembourg tax leaks. This event provides a unique opportunity to examine investors' reaction to revelation of a firm's specific tax avoidance strategies and the firm's efforts to reduce the associated tax risks. Prior research investigating the relation of tax risk and firm value has depended on measures that could be compromised by firm reporting choices (e.g., uncertain tax benefit disclosures). The exogenous nature of the Luxembourg tax leaks provides an opportunity to better disentangle a firm's actual tax risk from its “self-reported” tax risk. We find, on average, investors reacted positively to news of firms' inclusion in the tax leaks. This is in contrast to the documented negative reaction to news of other tax shelter participation and the negative media and political reaction to the Luxembourg tax leaks. We attribute the difference in market reaction to information on firms' preemptive steps to reduce the risk associated with their tax strategies by securing advance tax rulings. In cross-sectional analysis, we observe that among U.S. multinational firms, the market reacted more positively for those firms perceived to be less tax aggressive, as proxied by the firm's cash effective tax rate. In addition, we find limited evidence of corporate governance explaining the variation in market reaction. We also fail to find empirical evidence of political or reputational costs explaining the variation in market reaction.

Author: Ms.Era Dabla-Norris
Publisher: International Monetary Fund
ISBN: 1475595166
Category : Business & Economics
Languages : en
Pages : 40

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Book Description
Tax compliance costs tend to be disproportionately higher for small and young businesses. This paper examines how the quality of tax administration affects firm performance for a large sample of firms in emerging market and developing economies. We construct a novel, internationally comparable, and multidimensional index of tax administration quality (the TAQI) using information from the Tax Administration Diagnostic Assessment Tool. We show that better tax administration attenuates the productivity gap of small and young firms relative to larger and older firms, a result that is robust to controlling for other aspects of tax policy and of economic governance, alternative definitions of small and young firms, and measures of the quality of tax administration. From a policy perspective, we provide evidence that countries can reap growth and productivity dividends from improvements in tax administration that lower compliance costs faced by firms.

Author: John L. Campbell
Publisher:
ISBN:
Category :
Languages : en
Pages : 57

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Book Description
Prior research finds that mandatory risk factor disclosures are informative in that they increase investors' assessments of the volatility of a firm's cash flows. However, the literature is silent as to whether these disclosures provide information about the level of future cash flows and, ultimately, their implications for firm value. We address this question by examining the association between Form 10-K risk factor disclosures and future cash flows levels and stock returns. We use the setting of taxes because it is relatively easier to identify the specific income and cash flow statement line items to which these risks relate, and offer two main results. First, we find that tax risk factor disclosures are positively associated with future cash flows. This suggests that, on average, tax risk factor disclosures relate to tax positions that are rewarded with future tax savings. Second, we find that investors incorporate this relation into stock prices. In additional analysis, we find no evidence of a drift in stock prices, suggesting that investors incorporate the implications of tax risk factor disclosures in a timely manner. Overall, our results suggest that risk factor disclosures provide information about the level of a firm's future cash flows, that the risks discussed in these disclosures are - on average - value-increasing, and that investors incorporate this information into current stock prices.

Author: Russ Hamilton
Publisher:
ISBN:
Category :
Languages : en
Pages :

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Book Description
We examine the effect of high quality information technology (IT) on corporate tax outcomes. Using a measure of IT quality constructed from rankings in InformationWeek magazine, we find that firms with high quality IT are able to achieve both lower and less volatile cash effective tax rates than are other firms. These results suggest that firms with high quality IT are able to avoid more taxes while simultaneously incurring less tax risk compared to firms with lesser IT systems. We also perform mediation analyses to investigate the channels through which high quality IT enables effective tax planning. Results of these tests suggest that the most important driver of our findings is timely, reliable information facilitated by high quality IT. Our study contributes to both the IT and tax literatures by identifying and quantifying the returns to investments in IT in terms of more favorable corporate tax outcomes.