Does Greater Tax Risk Lead to Increased Firm Risk?
52 Pages Posted: 9 Dec 2012 Last revised: 17 Jun 2015
Date Written: June 15, 2015
Abstract
In this study we examine whether higher levels of tax risk are associated with increased firm risk, as perceived by capital market participants. Given the difficulties of measuring tax risk, we utilize four different proxies that prior research indicates capture greater tax-related uncertainty, including total unrecognized tax benefits (UTBs), current UTBs, discretionary permanent book-tax differences, and volatility in cash effective tax rates (ETRs). We provide robust evidence that discretionary book-tax differences and cash ETR volatility are positively associated with several measures of firm risk, while the UTB-based measures are either not associated with firm risk or negatively associated with firm risk. We also provide some evidence that low tax accrual quality drives the positive association between discretionary book-tax differences and firm risk. Our research increases our understanding of which tax metrics capture tax-related uncertainties that lead to assessments by investors and analysts of higher firm risk.
Keywords: Tax risk, tax avoidance, firm risk, cost of capital, uncertain tax positions
JEL Classification: G14, H25, M41, M49
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Earnings Management: New Evidence Based on Deferred Tax Expense
By John D. Phillips, Morton Pincus, ...
-
An Evaluation of Alternative Measures of Corporate Tax Rates
-
By Merle Erickson, Michelle Hanlon, ...
-
The Relation between Financial and Tax Reporting Measures of Income
By Gil B. Manzon, Jr. and George Plesko
-
What Can We Infer About a Firm's Taxable Income from its Financial Statements?