Is Tax Planning Associated with Tax Risk? Evidence from D&O Insurance

64 Pages Posted: 2 Mar 2018 Last revised: 31 Jul 2019

See all articles by Dain C. Donelson

Dain C. Donelson

University of Texas at Austin - Red McCombs School of Business

Jennifer L. Glenn

Texas A&M University - Department of Accounting

Christopher G. Yust

Texas A&M University

Date Written: July 2019

Abstract

This study uses directors’ and officers’ (D&O) insurance data to examine the relation between tax planning and tax risk. D&O insurance covers litigation costs for tax-related cases. Thus, D&O insurance premiums provide an independent and direct assessment of the risk in a firm’s tax planning strategies, which mitigates some of the challenges in studying the relation between tax planning and tax risk. Based on pricing decisions, D&O insurers appear to view tax aggressiveness, as measured by industry- and size-adjusted cash effective tax rates (a measure where higher rates are associated with more tax aggressiveness), as increasing tax-related litigation risk. Regarding tax uncertainty, premiums increase (decrease) as unrecognized tax benefits (UTB-related settlements with tax authorities) increase. Finally, D&O insurers focus on firms with outbound tax haven activity when pricing tax planning. Overall, this suggests D&O insurers include aspects of both tax aggressiveness and tax uncertainty when pricing tax risk.

Keywords: Tax Litigation, Tax Risk, Tax Avoidance, Tax Uncertainty, Directors’ and Officers’ Insurance

JEL Classification: D82, G30, H26, K22, K41, M41

Suggested Citation

Donelson, Dain C. and Glenn, Jennifer L. and Yust, Christopher G., Is Tax Planning Associated with Tax Risk? Evidence from D&O Insurance (July 2019). Available at SSRN: https://ssrn.com/abstract=3127802 or http://dx.doi.org/10.2139/ssrn.3127802

Dain C. Donelson

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States
512-232-3733 (Phone)

Jennifer L. Glenn

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Christopher G. Yust (Contact Author)

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States
979.845.3439 (Phone)

HOME PAGE: http://www.christopheryust.com

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