The Importance of the Internal Information Environment for Tax Avoidance

Posted: 12 Jan 2013 Last revised: 28 Sep 2017

See all articles by John Gallemore

John Gallemore

University of Chicago - Booth School of Business

Eva Labro

Kenan-Flagler Business School University of North Carolina

Date Written: September 9, 2014

Abstract

We show that firms’ ability to avoid taxes is affected by the quality of their internal information environment, with lower effective tax rates (ETRs) for firms that have high internal information quality. The effect of internal information quality on tax avoidance is stronger for firms in which information is likely to play a more important role. For example, firms with greater coordination needs because of a dispersed geographical presence benefit more from high internal information quality. Similarly, firms operating in a more uncertain environment benefit more from the quality of their internal information in helping them to reduce ETRs. In addition, we provide evidence that high internal information quality allows firms to achieve lower ETRs without increasing the risk of their tax strategies (as measured by ETR volatility). Overall, our study contributes to the literature on tax avoidance by providing evidence that the internal information environment of the firm is important for understanding its tax avoidance outcomes.

Keywords: internal information quality, management accounting, tax avoidance, tax risk

JEL Classification: M41, H25

Suggested Citation

Gallemore, John and Labro, Eva, The Importance of the Internal Information Environment for Tax Avoidance (September 9, 2014). Journal of Accounting & Economics (JAE), Vol. 60, No. 1, 2015; UNC Kenan-Flagler Research Paper No. 2013-7. Available at SSRN: https://ssrn.com/abstract=2199632 or http://dx.doi.org/10.2139/ssrn.2199632

John Gallemore (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Eva Labro

Kenan-Flagler Business School University of North Carolina ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
(919) 962-5747 (Phone)

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