Tax Aggressiveness and Idiosyncratic Volatility
51 Pages Posted: 25 Jan 2016 Last revised: 3 Jun 2021
Date Written: June 2, 2021
This study finds that aggressive tax strategies adopted by a firm affect idiosyncratic stock return volatility. Aggressive tax strategies, which I measure as tax paid by a firm divided by pretax income (adjusted for special items), are associated with higher levels of idiosyncratic stock volatility. Uncertainty associated with tax strategies may result due to several factors, such as penalties, fines, and additional tax payments if particular tax strategies are disallowed by taxation authorities, or if there are changes in tax rules. Such uncertainty affects the future cash flows of a firm and is reflected in more volatile stock returns. Financial constraints, corporate governance mechanisms, and information environments surrounding a firm influence the relation between idiosyncratic volatility and effective tax rates.
Keywords: Idiosyncratic risk, idiosyncratic volatility, tax aggressiveness, tax avoidance, tax planning
JEL Classification: G12, G30, H26
Suggested Citation: Suggested Citation