Legal Enforcement and Corporate Behavior: An Analysis of Tax Aggressiveness after an Audit
57 Pages Posted: 9 May 2013 Last revised: 12 Mar 2014
Date Written: September 5, 2013
Contrary to common expectations, this paper shows that legal enforcement may increase subsequent corporate misbehavior. Using IRS data, we find that corporations gradually increase their tax aggressiveness after an audit for a few years and then reduce it sharply. We show that this U-shaped impact is consistent with strategic responses on the part of firms and Bayesian updating of audit risk. This adverse effect on corporate behavior calls for reexamining both theory and policy of legal enforcement.
Keywords: legal enforcement, tax audit, tax evasion, tax avoidance, Bayesian updating
JEL Classification: H25, K42, M42
Suggested Citation: Suggested Citation