Product Market Power and Tax Avoidance: Market Leaders, Mimicking Strategies, and Stock Returns
Posted: 14 Feb 2013
Date Written: February 13, 2013
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.
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