Corporate Tax Aggressiveness and Firm Risk

ABSTRACT

Prior research has argued that a firm’s investment in aggressive corporate tax avoidance activities, as measured by low cash effective tax rates (Cash ETR) or high reserves for unrecognized tax benefits (UTB), results in higher firm risk. However, it is not clear that activities that reduce taxes or increase the UTB are inherently risky. In this paper we argue that the volatility of Cash ETR is a better proxy for the riskiness of aggressive corporate tax avoidance than the level of Cash ETR or UTB. Consistent with this view we find a positive relation between the standard deviation of annual Cash ETRs and the volatility of stock returns in the following year. In contrast, low Cash ETRs or high UTBs are not associated with future stock return volatility. Our results suggest that the volatility of Cash ETR reflects the riskiness of a firm’s tax positions better than the level of Cash ETR or UTBs.

Keywords: tax aggressiveness, risk

Source : Guenther, David A., Matsunaga, Steven R. and Williams, Brian M., Corporate Tax Aggressiveness and Firm Risk (September 27, 2012). Available at SSRN: http://ssrn.com/abstract=2153187