Abstract

http://ssrn.com/abstract=1649679
 
 

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Corporate Tax Avoidance and Stock Price Crash Risk: Firm-Level Analysis


Jeong-Bon Kim V


City University of Hong Kong

Yinghua Li


Arizona State University (ASU) - School of Accountancy

Liandong Zhang


City University of Hong Kong

July 27, 2010

Journal of Financial Economics, Vol. 100, pp. 639-662, 2011.

Abstract:     
Using a large sample of U.S. firms for the period 1995-2008, we provide strong and robust evidence that corporate tax avoidance is positively associated with firm-specific stock price crash risk. This finding is consistent with the following view: Tax avoidance facilitates managerial rent extraction and bad news hoarding activities for extended periods by providing tools, masks, and justifications for these opportunistic behaviors. The hoarding and accumulation of bad news for extended periods lead to stock price crashes when the accumulated hidden bad news crosses a tipping point, and thus comes out all at once. Moreover, we show that the positive relation between tax avoidance and crash risk is attenuated when firms have strong external monitoring mechanisms such as high institutional ownership, high analyst coverage, and greater takeover threat from corporate control markets.

Number of Pages in PDF File: 67

Keywords: Tax avoidance, crash risk, agency theory, governance, extreme outcome

JEL Classification: G12, G14, H26, M41

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Date posted: July 28, 2010 ; Last revised: April 19, 2011

Suggested Citation

Kim, Jeong-Bon and Li, Yinghua and Zhang, Liandong, Corporate Tax Avoidance and Stock Price Crash Risk: Firm-Level Analysis (July 27, 2010). Journal of Financial Economics, Vol. 100, pp. 639-662, 2011.. Available at SSRN: http://ssrn.com/abstract=1649679

Contact Information

Jeong-Bon Kim V
City University of Hong Kong ( email )
83 Tat Chee Avenue
Kowloon
Hong Kong
China
Yinghua Li (Contact Author)
Arizona State University (ASU) - School of Accountancy ( email )
Tempe, AZ 85287
United States
480-965-5188 (Phone)
HOME PAGE: http://my.wpcarey.asu.edu/directory/people/profile.cfm?person=2255159
Liandong Zhang
City University of Hong Kong ( email )
83 Tat Chee Avenue
Kowloon
Hong Kong
China
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