Does Greater Tax Risk Lead to Increased Firm Risk?

52 Pages Posted: 9 Dec 2012 Last revised: 17 Jun 2015

See all articles by Michelle Hutchens

Michelle Hutchens

University of Illinois

Sonja O. Rego

Indiana University - Kelley School of Business - Department of Accounting

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

Hutchens, Michelle and Rego, Sonja O., Does Greater Tax Risk Lead to Increased Firm Risk? (June 15, 2015). Available at SSRN: https://ssrn.com/abstract=2186564 or http://dx.doi.org/10.2139/ssrn.2186564

Michelle Hutchens

University of Illinois ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Sonja O. Rego (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812 855-6356 (Phone)

HOME PAGE: http://kelley.iu.edu/Accounting/faculty/page12887.cfm?ID=33017

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