Examining Tax Strategy Choice

Most recent tax research examines the level of firms' effective tax rates (ETRs), focusing on tax avoidance. However, theoretical work and research on book-tax tradeoffs and reputational costs indicate some firms have other tax planning goals. Moreover, anecdotal evidence suggests consistent tax outcomes are important; therefore, the volatility of ETRs may be an alternative aspect of firms' tax planning. In this study, I find some firms utilize a second, distinct approach to tax strategy - maintaining low ETR volatility - by documenting systematic differences in firm characteristics associated with each tax strategy approach and a predictable shift in characteristics when firms change tax strategies. In combination, these results identify at least two distinct approaches to tax strategy. I also find firms exhibiting low ETR volatility earn significantly higher median buy-and-hold returns than firms exhibiting low ETR levels, consistent with benefits to alternative tax strategies.

The impact of tax policy uncertainty on forecasting

This study examines the impact of tax policy uncertainty (TPU) on analysts' forecasts and managers' interim estimates of effective tax rates (ETRs). We adopt a broad definition of TPU that encompasses both the legislative and regulatory processes and perform tests to validate a news-based measure of TPU consistent with our definition. We document that 1) analysts' implied ETR forecasts are less accurate and more disperse during periods of high TPU, 2) managers' ETR estimates are less accurate during periods of high TPU, and 3) the presence of relatively inaccurate management ETR estimates strengthens the effects of TPU on analysts' ETR forecasts. We further find that firm-level tax-related complexity exacerbates the effects of TPU on analysts' and managers' ETR predictions. Overall, our results are consistent with uncertainty surrounding tax policy impairing analysts' and managers' ability to assess and predict future tax-related fundamentals, thus imposing real costs on managers and market participants.

Corporate Social Responsibility and Tax Management: The Moderating Effect of Beliefs about Corporate Tax Duty

Limited empirical evidence exists regarding investor perceptions of tax management and whether investors consider paying taxes a social responsibility. To fill this gap, we use an experiment to explore investor perceptions about the corporate duty to pay or minimize taxes. We find that investors view paying taxes (rather than minimizing taxes) as socially responsible. We also measure participants’ attitudes about the corporate duty to pay or minimize taxes and find that participants lean more towards a view that corporations have a duty to pay taxes. In a path analysis, we find that a firm’s tax management and its performance in a non-tax area of CSR both influence investors’ perceptions of managerial quality that ultimately impacts investors’ willingness to invest. We also find that the investor’s attitude about the corporate tax duty moderates the association between tax management and investor perceptions of the quality of managerial decision-making.

Big Data Analytics in IRS Audit Procedures and Its Effects on Tax Compliance: A Moderated Mediation Analysis

Big data analytics could be a panacea for the IRS by enabling creation of taxpayer profiles to better capture noncompliance using artificial intelligence and machine learning, requiring fewer costly manpower hours. Privacy, fair information practices, and embedded biases are critiques of such practices, and it is unknown how taxpayers will respond. Deterrence theory suggests improved audit effectiveness will increase compliance but excludes elements of tax morale, including perceived fairness. We find evidence supporting a moderated mediation model where procedural fairness mediates the relationship between audit procedures and tax compliance, moderated by participatory monitoring, which captures how effects vary when taxpayers willingly increase traceability of their income by advertising online. When taxpayers advertise business online, use of advanced technologies in audit selection significantly increases compliance with no significant effect on perceived fairness; when they do not, use of advanced technologies has no effect on compliance, but significantly decreases perceived fairness.

Market and Firm Reaction to Targeted Tax Benefits: Evidence from the Tax Reform Act of 1986

A growing body of work examines market and firm responses to specific tax benefits. We extend this literature by examining market and firm reactions to an economically significant targeted tax refund granted to a few large, but poorly performing, steel firms by the Tax Reform Act of 1986 (TRA86). We find, relative to steel firms not receiving the refund, qualifying firms experience either a negative or insignificant market reaction around each of three key dates in the TRA86 legislative process. Using difference-in-differences analyses to test a variety of refund uses, we find that refund recipients use the proceeds to pay down debt rather than to increase capital assets, payouts to shareholders, acquisitions, or employment. Overall, we find targeted tax benefits granted to significant but struggling firms, while potentially politically appealing, appear to generate limited economic benefits to those targeted firms.

CEO Sports Hobby and Firms' Tax Aggressiveness

Recent accounting research suggests that individual executives play a significant role in shaping a firm's tax planning. Building on psychology research that finds sports interests reflect an individual's risk-taking preferences, we develop a novel measure of innate and non-pecuniary CEO risk attitudes based on the riskiness of CEOs' sports hobbies and examine whether the measure is associated with corporate tax aggressiveness. We find that firms managed by CEOs with riskier sports hobbies are more aggressive in their tax planning. This association is more pronounced for CEOs with greater financial incentives and greater power in making decisions. Our results are robust to using alternative measures of CEO sports risks, and after accounting for the self-selection of the disclosure of CEO sports hobbies.