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Taxes and Peer Effects

45 Pages Posted: 14 Jan 2016  

Andrew Bird

Carnegie Mellon University - Tepper School of Business

Alexander Edwards

University of Toronto - Rotman School of Management

Thomas G. Ruchti

Carnegie Mellon University - Tepper School of Business

Date Written: January 11, 2016

Abstract

A growing literature examines how a firm’s behavior impacts the behavior of its peers. In this paper, we examine how changes in tax paying, and the associated financial reporting, impact a firm’s peers. Changes to tax paying and reporting behavior at other firms within a peer group can be affected by many of the same factors, such as industry-level tax policy changes or audit risk, so we make use of exogenous–to the peer firms–shocks to tax behavior. Following the methodology of Dyreng, Hanlon, and Maydew [2010], we estimate managerial tax avoidance fixed effects and use these to identify tax rate shocks associated with executive turnover. We find that peer firms respond to these shocks by changing their GAAP tax rates in the same direction. The magnitude of the effect corresponds to an approximately 10% response to the average change in peer group GAAP effective tax rates. Our evidence suggests that these peer effects occur only for book, rather than cash, effective tax rates. This finding of a differential response in financial reporting compared to tax payments is consistent with the primacy of earnings-based measures to managers and other capital market participants.

Keywords: effective tax rates, peer effects, taxes

JEL Classification: H25, M41

Suggested Citation

Bird, Andrew and Edwards, Alexander and Ruchti, Thomas G., Taxes and Peer Effects (January 11, 2016). Rotman School of Management Working Paper No. 2714468. Available at SSRN: https://ssrn.com/abstract=2714468 or http://dx.doi.org/10.2139/ssrn.2714468

Andrew Bird

Carnegie Mellon University - Tepper School of Business ( email )

Pittsburgh, PA 15213-3890
United States

Alexander S. Edwards (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Thomas G. Ruchti

Carnegie Mellon University - Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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