Are 'Tax Aggressive' Firms Just Inflating Earnings?
David A. Guenther
University of Oregon - Department of Accounting
Linda K. Krull
University of Oregon
Brian M. Williams
Indiana University - Kelley School of Business - Department of Accounting
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.
Number of Pages in PDF File: 44
Keywords: tax avoidance, earnings management, crash risk
JEL Classification: M41, H25, G12
Date posted: March 17, 2014 ; Last revised: November 11, 2014