Are 'Tax Aggressive' Firms Just Inflating Earnings?
44 Pages Posted: 17 Mar 2014 Last revised: 11 Nov 2014
Date Written: October 31, 2014
We investigate whether low Cash ETRs are associated with two distinct effects — tax avoidance and low earnings quality — and if so, whether the two effects can be separated. Separating these effects is important: if upward earnings management is driving low Cash ETRs, inferences based on tax avoidance may not be valid. Our results demonstrate Cash ETRs are associated with both earnings quality and tax avoidance. We test an alternative measure, the ratio of cash taxes paid to pretax operating cash flows, and provide evidence that this measure mitigates the association with earnings quality while retaining the association with tax avoidance.
Keywords: tax avoidance, earnings management, crash risk
JEL Classification: M41, H25, G12
Suggested Citation: Suggested Citation