Information Processing Costs and Corporate Tax Avoidance: Evidence from the SEC's XBRL Mandate

49 Pages Posted: 26 Mar 2016 Last revised: 16 Mar 2021

See all articles by Jeff Zeyun Chen

Jeff Zeyun Chen

Texas Christian University

Hyun A. Hong

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management

Jeong-Bon Kim

City University of Hong Kong

Ji Woo Ryou

West Virginia University

Date Written: January 11, 2021

Abstract

The IRS uses information contained in financial statements as well as tax returns to detect tax avoidance behavior. We examine the impact on corporate tax avoidance behavior of reductions in the IRS’s information processing costs resulting from the mandatory adoption of XBRL for financial reporting. Motivated by the recent debate in the U.S. Congress over the cost-benefit of mandatory XBRL reporting for small firms, we pay particular attention to small firms, which inherently have relatively high information frictions. We find that the adoption of XBRL for financial reporting results in a significant decrease in tax avoidance. We further find that the negative relation between XBRL reporting and tax avoidance is less prominent for firms subject to more intense IRS monitoring in the pre-XBRL-reporting period. Overall, our results suggest that XBRL reporting reduces the cost of IRS monitoring in terms of information processing, which dampens managerial incentives to engage in tax avoidance behavior.

Keywords: XBRL reporting; tax avoidance; information processing costs; IRS monitoring; tax audit risk; tax accrual

JEL Classification: H26, M41

Suggested Citation

Chen, Jeff Zeyun and Hong, Hyun A. and Kim, Jeong-Bon and Ryou, Ji Woo, Information Processing Costs and Corporate Tax Avoidance: Evidence from the SEC's XBRL Mandate (January 11, 2021). Journal of Accounting and Public Policy, Vol. 40, No. 2, 106822, Available at SSRN: https://ssrn.com/abstract=2754427 or http://dx.doi.org/10.2139/ssrn.2754427

Jeff Zeyun Chen (Contact Author)

Texas Christian University ( email )

2900 Lubbock Ave
Fort Worth, TX 76109
United States

Hyun A. Hong

University of California, Riverside (UCR) - A. Gary Anderson Graduate School of Management ( email )

Riverside, CA 92521
United States

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Ji Woo Ryou

West Virginia University ( email )

PO Box 6025
Morgantown, WV 26506
United States

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