Are 'Tax Aggressive' Firms Just Inflating Earnings?

44 Pages Posted: 17 Mar 2014 Last revised: 11 Nov 2014

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

Date Written: October 31, 2014

Abstract

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

Guenther, David A. and Krull, Linda K. and Williams, Brian M., Are 'Tax Aggressive' Firms Just Inflating Earnings? (October 31, 2014). Available at SSRN: https://ssrn.com/abstract=2409688 or http://dx.doi.org/10.2139/ssrn.2409688

David A. Guenther (Contact Author)

University of Oregon - Department of Accounting ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
541-346-5384 (Phone)

Linda K. Krull

University of Oregon ( email )

1208 University of Oregon
Eugene, OR 97403-1208
United States
541-346-3252 (Phone)

Brian M. Williams

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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