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The Real Effects of Opacity: Evidence from Tax Avoidance

61 Pages Posted: 16 Mar 2013  

Jon N. Kerr

City University of New York (CUNY) - Stan Ross Department of Accountancy

Date Written: November 19, 2012

Abstract

This study provides evidence on a significant real consequence of an opaque financial reporting information environment: increased corporate tax avoidance. Using an international sample of firms, I find that firms with a more opaque information environment, as measured at both the firm and country level, exhibit higher levels of firm-specific tax avoidance. More importantly, additional tests using the adoption of International Financial Reporting Standards (IFRS) as an exogenous shock to the information environment while simultaneously controlling for tax regime changes around the date of IFRS adoption provide direct evidence on the direction of the association, namely that opacity causes tax avoidance. Similarly, the results from tests using the initial enforcement of insider trading laws provide additional support for a directional hypothesis. In support of the firm-level findings, I also find evidence in the aggregate that opacity is associated with countries collecting less corporate tax revenues as a percentage of gross domestic product. In whole, these findings suggest that tax avoidance is a significant real effect of opacity with implications for practitioners, regulators, researchers, and tax-enforcement agencies.

Keywords: Tax Avoidance, IFRS Adoption, Information Opacity

JEL Classification: C23, F23, G14, H25, H26, K33, M41

Suggested Citation

Kerr, Jon N., The Real Effects of Opacity: Evidence from Tax Avoidance (November 19, 2012). Columbia Business School Research Paper No. 13-16. Available at SSRN: https://ssrn.com/abstract=2234197 or http://dx.doi.org/10.2139/ssrn.2234197

Jon N. Kerr (Contact Author)

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3164 (Phone)
646-312-3161 (Fax)

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