Does Tax Aggressiveness Reduce Corporate Transparency?

52 Pages Posted: 27 Mar 2011 Last revised: 30 Jan 2013

Karthik Balakrishnan

London Business School

Jennifer L. Blouin

University of Pennsylvania - Accounting Department

Wayne R. Guay

University of Pennsylvania - Accounting Department

Date Written: September 7, 2012

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.

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

JEL Classification: H20, M41

Suggested Citation

Balakrishnan, Karthik and Blouin, Jennifer L. and Guay, Wayne R., Does Tax Aggressiveness Reduce Corporate Transparency? (September 7, 2012). Available at SSRN: https://ssrn.com/abstract=1792783 or http://dx.doi.org/10.2139/ssrn.1792783

Karthik Balakrishnan

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

Jennifer L. Blouin (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-1266 (Phone)

Wayne R. Guay

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
1329 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6365
United States
215-898-7775 (Phone)
215-573-2054 (Fax)

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