What Does Tax Aggressiveness Signal? Evidence from Stock Price Reactions to News about Tax Shelter Involvement
Journal of Public Economics, Forthcoming
Posted: 8 Oct 2008
Date Written: October 7, 2008
We study the stock price reaction to news about corporate tax aggressiveness. We find that, on average, a company's stock price declines when there is news about its involvement in tax shelters. We find some limited evidence for cross-sectional variation in the reaction. For example, the reaction is more negative for firms in the retail sector, suggesting that part of the reaction may be a consumer/taxpayer backlash. In addition, the reaction is less negative for firms that are viewed to be generally less tax aggressive, as proxied by the firm's cash effective tax rate. We interpret this as being consistent with the market reacting positively to evidence that a firm is trying to reduce taxes when their financial reports would lead one to believe the firm is not tax aggressive.
Keywords: tax aggressiveness, tax shelter, market reaction
JEL Classification: H25
Suggested Citation: Suggested Citation