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

See all articles by Andrew M. Bauer

Andrew M. Bauer

University of Waterloo - School of Accounting and Finance

Xiaohua Fang

Georgia State University - School of Accountancy

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Date Written: July 24, 2018

Abstract

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

Suggested Citation

Bauer, Andrew M. and Fang, Xiaohua and Pittman, Jeffrey A., The Importance of IRS Enforcement to Stock Price Crash Risk: The Role of CEO Characteristics (July 24, 2018). Available at SSRN: https://ssrn.com/abstract=2980012 or http://dx.doi.org/10.2139/ssrn.2980012

Andrew M. Bauer

University of Waterloo - School of Accounting and Finance ( email )

200 University Ave W
Waterloo, Ontario N2L 3G1
Canada

Xiaohua Fang

Georgia State University - School of Accountancy ( email )

P.O. Box 4050
Atlanta, GA 30302-4050
United States

Jeffrey A. Pittman (Contact Author)

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

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