Conforming Tax Avoidance and Capital Market Pressure

The Accounting Review, Forthcoming

67 Pages Posted: 17 Jun 2015 Last revised: 22 Feb 2019

See all articles by Brad A. Badertscher

Brad A. Badertscher

University of Notre Dame

Sharon P. Katz

INSEAD

Sonja O. Rego

Indiana University - Kelley School of Business - Department of Accounting

Ryan J. Wilson

University of Oregon

Date Written: December 17, 2018

Abstract

In this study we develop a measure of corporate tax avoidance that reduces both financial and taxable income, which we refer to as “book-tax conforming” tax avoidance. We use simulation analyses, LIFO/FIFO inventory method conversions, and samples of private and public firms, to validate our measure of conforming tax avoidance. We then investigate the prevalence of conforming tax avoidance within a sample of public firms. Results from the validation tests indicate that our measure of conforming tax avoidance successfully captures book-tax conforming transactions and thus, variation in conforming tax avoidance across firms. Consistent with expectations, we also find that the extent to which public firms engage in conforming tax avoidance varies systematically with the capital market pressures to which they are subject. For example, public firms that lack analyst following, do not issue equity securities, report lower sales growth, or smaller discretionary accruals engage in relatively more conforming tax avoidance and less nonconforming tax avoidance. Our study develops a new measure of conforming tax avoidance that should be useful in future research and provides new insights on the extent to which public firms are willing to reduce income tax liabilities at the expense of reporting lower financial income.

Keywords: Tax avoidance, Book-tax conformity, Capital market pressure, Private firms

JEL Classification: M41, M49

Suggested Citation

Badertscher, Brad A. and Katz, Sharon P. and Rego, Sonja O. and Wilson, Ryan J., Conforming Tax Avoidance and Capital Market Pressure (December 17, 2018). The Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2619317 or http://dx.doi.org/10.2139/ssrn.2619317

Brad A. Badertscher

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Sharon P. Katz

INSEAD ( email )

Boulevard de Constance
CEDEP No. 11
F-7705 Fontainebleau Cedex, 77305
France

Sonja O. Rego (Contact Author)

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

1309 E. 10th Street
Bloomington, IN 47405
United States
812 855-6356 (Phone)

HOME PAGE: http://kelley.iu.edu/Accounting/faculty/page12887.cfm?ID=33017

Ryan J. Wilson

University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

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