Product Market Power and Tax Avoidance: Market Leaders, Mimicking Strategies, and Stock Returns

Posted: 14 Feb 2013 Last revised: 17 Jul 2014

See all articles by Thomas R. Kubick

Thomas R. Kubick

University of Nebraska-Lincoln

Dan Lynch

University of Wisconsin - Madison - Department of Accounting and Information Systems

Michael Mayberry

University of Florida - Fisher School of Accounting

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: December 12, 2013

Abstract

Product market power provides firms with comparative advantages through more persistent profitability and insulation from competitive threats. These advantages likely provide firms with the ability to engage in greater tax avoidance. We present evidence consistent with this hypothesis. We also show that firms mimic the tax outcomes of their product market leaders. Among firms with greater product market power and comparatively high cash tax avoidance, we find stock prices to be less informative and that investors require additional compensation for the risks associated with comparatively high cash tax avoidance. Our results survive numerous robustness tests. Overall, our results suggest that industry dynamics, particularly related to a firm’s competitive position, play a meaningful role in corporate tax policy.

Keywords: Tax avoidance, Product market competition, Agency costs, Mimicry

JEL Classification: D40, G32, H26

Suggested Citation

Kubick, Thomas R. and Lynch, Dan and Mayberry, Michael and Omer, Thomas C., Product Market Power and Tax Avoidance: Market Leaders, Mimicking Strategies, and Stock Returns (December 12, 2013). Accounting Review, (March 2015) Forthcoming. Available at SSRN: https://ssrn.com/abstract=2215924 or http://dx.doi.org/10.2139/ssrn.2215924

Thomas R. Kubick

University of Nebraska-Lincoln ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Dan Lynch (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Michael Mayberry

University of Florida - Fisher School of Accounting ( email )

Warrington College of Business
PO Box 117166
Gainesville, FL 32611-7166
United States

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

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