The Importance of IRS Enforcement to Stock Price Crash Risk: The Role of CEO Characteristics
59 Pages Posted: 5 Jun 2017 Last revised: 5 Aug 2018
Date Written: July 24, 2018
We analyze whether tough tax enforcement generates a positive externality by lowering information asymmetry stemming from managers’ bad news hoarding activities evident in stock price crash risk. Supporting this prediction, we find a negative relation between the threat of an IRS audit and stock price crash risk. Our strong, robust evidence is consistent with recent theory that outside investors learn more about firms when corporate tax enforcement is stricter. In evidence consistent with another prediction, we find that the role that IRS audit rates play in constraining crash risk intensifies when firms experience worse agency conflicts arising from CEO characteristics. Collectively, our research implies that external monitoring by tax authorities protects shareholders against managers suppressing negative firm-specific information that engenders stock price crash risk, particularly when CEOs have a wider scope and stronger incentives to hoard bad news.
Keywords: Tax Enforcement; Information Asymmetry; Stock Price Crash Risk; Monitoring
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