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

Posted: 14 Feb 2013  

Dan Lynch

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

Thomas R. Kubick

University of Kansas

Michael A. 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: February 13, 2013

Abstract

Firms with greater product market power have more slack in their decision making because they are able to, at least partially, insulate their cash flows and earnings realizations from shocks to their economic state relative to other firms. Using the period 1993 through 2010, and multiple proxies for tax avoidance, we find a positive relation between product market power and tax avoidance. We also provide evidence that firms mimic the product market leader’s tax avoidance activities which impact book effective tax rates, and this result strengthens in industry concentration. Finally, we analyze the stock market response to tax avoidance, market power and their interactions. Results suggest investors receive higher subsequent stock returns from firms that engage in more aggressive cash tax avoidance, and this relation strengthens in market power.

Suggested Citation

Lynch, Dan and Kubick, Thomas R. and Mayberry, Michael A. and Omer, Thomas C., Product Market Power and Tax Avoidance: Market Leaders, Mimicking Strategies, and Stock Returns (February 13, 2013). 2013 American Taxation Association Midyear Meeting: Research Forum. Available at SSRN: https://ssrn.com/abstract=2217152

Dan Lynch

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

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

Thomas R. Kubick

University of Kansas ( email )

1415
Lawrence, KS 66045
United States

Michael A. 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 (Contact Author)

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

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

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