Tax Avoidance and Firm Risk
David A. Guenther
University of Oregon - Department of Accounting
Steven R. Matsunaga
University of Oregon
Brian M. Williams
Indiana University - Kelley School of Business - Department of Accounting
Prior research has argued that corporate tax avoidance increases firm risk. To provide evidence on this association we investigate whether tax decisions impact firm risk and the extent to which empirical measures of the firm's tax avoidance reflect risky choices. We find that tax risk, as reflected in the volatility of the Cash ETR, is positively related to future total firm risk. This suggests that tax risk contributes to overall firm risk and that the volatility of the Cash ETR reflects tax rate uncertainty. We do not find evidence that either the level of Cash ETR or the UTB reserve is related to future firm risk. Therefore, our results do not support the notion implicit in several recently published studies and concurrent working papers that low Cash ETRs reflect the extent to which firms undertake risky tax positions, or the degree of uncertainty about future tax payments.
Number of Pages in PDF File: 38
Keywords: effective tax rates, unrecorded tax benefit, tax aggressiveness, tax risk
JEL Classification: M41
Date posted: September 27, 2012 ; Last revised: March 5, 2014
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