Citations (8)



The Reputational Costs of Tax Avoidance

John Gallemore

University of Chicago - Booth School of Business

Edward L. Maydew

University of North Carolina at Chapel Hill

Jacob R. Thornock

Brigham Young University

July 1, 2013

Contemporary Accounting Research, Forthcoming

We investigate whether firms and their top executives bear reputational costs from engaging in aggressive tax avoidance activities. Prior literature has posited that reputational costs partially explain why so many firms apparently forgo the benefits of tax avoidance, the so-called “under-sheltering puzzle.” We employ a database of 118 firms that were subject to public scrutiny for having engaged in tax shelters, representing the largest sample of publicly identified corporate tax shelters analyzed to date. We examine the reputational costs that prior research has shown that firms and managers face in cases of alleged misconduct: increased CEO and CFO turnover, auditor turnover, lost sales, increased advertising costs, and decreased media reputation. Across a battery of tests, we find little evidence that firms or their top executives bear significant reputational costs as a result of being accused of engaging in tax shelter activities. Moreover, we find no decrease in firms’ tax avoidance activities after being accused of tax shelter activity. Finally, in tests of the capital market reaction to news of tax shelter involvement, we find that negative event-period returns fully reverse within a few weeks of the public scrutiny, consistent with a temporary market penalty to tax shelter news. In all, we conclude that there is little evidence of tax shelter usage leading to reputational costs at the firm level.

Number of Pages in PDF File: 45

Keywords: reputation, tax shelters, tax avoidance, under-sheltering

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Date posted: January 17, 2012 ; Last revised: October 7, 2013

Suggested Citation

Gallemore, John and Maydew, Edward L. and Thornock, Jacob R., The Reputational Costs of Tax Avoidance (July 1, 2013). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1986226 or http://dx.doi.org/10.2139/ssrn.1986226

Contact Information

John Gallemore
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Chicago Booth School of Business Logo

Edward L. Maydew
University of North Carolina at Chapel Hill ( email )
McColl Building
Chapel Hill, NC 27599-3490
United States
919-843-9356 (Phone)
HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/accounting/edward-maydew

Jacob Thornock (Contact Author)
Brigham Young University ( email )
Provo, UT 84602
United States
8014220828 (Phone)
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