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

67 Pages Posted: 28 Jul 2010 Last revised: 19 Apr 2011

Jeong-Bon Kim

University of Waterloo

Yinghua Li

Arizona State University (ASU) - School of Accountancy

Liandong Zhang

Singapore Management University - School of Accountancy

Date Written: July 27, 2010

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.

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

JEL Classification: G12, G14, H26, M41

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: https://ssrn.com/abstract=1649679

Jeong-Bon Kim

University of Waterloo ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1
Canada
1-519-888-4567 (Phone)
1-519-888-7562 (Fax)

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

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

HOME PAGE: http://accountancy.smu.edu.sg/faculty/profile/150531/Liandong-ZHANG

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