Customer Concentration and Corporate Tax Avoidance

53 Pages Posted: 24 Jul 2014 Last revised: 9 Nov 2018

See all articles by Henry He Huang

Henry He Huang

Yeshiva University - Sy Syms School of Business

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Chong Wang

University of Kentucky

Hong Xie

University of Kentucky - Von Allmen School of Accountancy

Date Written: May 30, 2014

Abstract

We examine the relation between customer concentration, a critically important aspect of a firm’s business model, and the level of corporate tax avoidance. A firm with a concentrated corporate customer base needs to hold more cash, faces a higher likelihood of financial distress, has a stronger incentive to manage earnings upwards, and is likely to be more risk tolerant. Since tax planning can increase both cash flow and accounting earnings and risk tolerant firms are more likely to accept the risks inherent in tax avoidance activities, we hypothesize that corporate customer concentration is positively associated with tax avoidance. As predicted, we find that various measures of corporate customer concentration are positively related to tax avoidance as measured by effective tax rate and book-tax difference. We also document that this positive relation is more pronounced when the firm captures a lower market share in its industry, enjoys less revenue diversification, and engages in less real earnings management. By contrast, we contend that a governmental major customer provides stable cash flow to suppliers and thus alleviates their need for tax avoidance. Consistent with this reasoning, we find that firms engage in lower levels of tax avoidance when they have a governmental major customer, and this association is less pronounced under Democratic presidencies. Together, our findings indicate that a firm’s business model (i.e., corporate and governmental major customer) has a significant effect on the extent to which it avoids taxes.

Keywords: customer concentration, tax avoidance, corporate major customer, governmental major customer, political cycle

JEL Classification: H20, G30, G38, M49

Suggested Citation

Huang, Henry and Lobo, Gerald J. and Wang, Chong and Xie, Hong, Customer Concentration and Corporate Tax Avoidance (May 30, 2014). Journal of Banking and Finance, Vol. 72, 2016. Available at SSRN: https://ssrn.com/abstract=2469859 or http://dx.doi.org/10.2139/ssrn.2469859

Henry Huang (Contact Author)

Yeshiva University - Sy Syms School of Business ( email )

New York, NY 10033
United States
8322763834 (Phone)

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Chong Wang

University of Kentucky ( email )

Lexington, KY 40506
United States

Hong Xie

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States
(859) 257-4648 (Phone)
(859) 257-3654 (Fax)

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