Does Tax Aggressiveness Reduce Corporate Transparency?

Abstract:     
This paper investigates whether aggressive tax planning firms have less transparent information environments. Although tax planning provides expected tax savings, it can simultaneously increase the financial complexity of the organization. And, to the extent that this greater financial complexity cannot be adequately communicated to outside parties, such as investors and analysts, transparency problems can arise. Our investigation of the association between a newly developed measure of tax aggressiveness and information asymmetry, analyst forecast errors, and earnings quality suggests that aggressive tax planning decreases corporate transparency. We also find evidence, however, that managers at tax aggressive firms attempt to mitigate these transparency problems by increasing the volume of tax-related disclosure. Overall, our results suggest that firms face a trade-off between financial transparency and aggressive tax planning thereby potentially explaining why some firms appear to engage in more conservative tax planning than would otherwise be optimal.

Number of Pages in PDF File: 52

Keywords: Tax aggressiveness, tax planning, information content, earnings quality

JEL Classification: H20, M41

working papers series