Do Firms Engage in Aggressive Tax Reporting Prior to Bankruptcy?

Abstract

Our study examines the tax reporting behaviors of firms just before they file for bankruptcy (“prebankruptcy firms”). Specifically, we investigate whether pre-bankruptcy firms engage in more aggressive tax reporting, in comparison to non-bankruptcy firms. We also investigate whether the relationship between aggressive financial reporting and aggressive tax reporting is different across pre-bankruptcy and non-bankruptcy firms. Our findings suggest that pre-bankruptcy firms engage in more aggressive tax reporting, vis-à-vis non-bankruptcy firms. Additionally, we find that the positive relation between aggressive book reporting and aggressive tax reporting is stronger among pre-bankruptcy firms, vis-à-vis firms that are not approaching bankruptcy. Thus, our findings not only further our understanding of the motivations behind these significant reporting decisions, but also help us understand how a growing proportion of corporate managers respond to increasing pressures to perform in a depressed economy.

Keywords: Tax Reporting, Bankruptcy, Aggressive Reporting

JEL Classification: M400, M410, M480