Stock Liquidity and Corporate Tax Avoidance
50 Pages Posted: 6 Sep 2013 Last revised: 4 Oct 2017
Date Written: October 2, 2017
We show that firms with higher stock liquidity engage less in extreme (i.e., either overly aggressive or overly conservative) tax avoidance. The effect of stock liquidity on tax avoidance is economically meaningful, is robust across alternative measures of tax avoidance and stock liquidity, and holds after controlling for potential endogenous effects. We further document that the effect of stock liquidity on tax avoidance is amplified for firms with high proportions of activist shareholders, and is attenuated for firms with high levels of stock price informativeness. Overall, our findings suggest that stock liquidity mitigates extreme tax avoidance by enhancing shareholders’ monitoring over firm management.
Keywords: Stock Liquidity, Tax Avoidance, Agency Conflicts
JEL Classification: G10, G30, M40
Suggested Citation: Suggested Citation