Tax Avoidance and Financial Statement Readability

European Accounting Review, Forthcoming

43 Pages Posted: 14 Jun 2018 Last revised: 24 Aug 2020

See all articles by Justin Hung Nguyen

Justin Hung Nguyen

Massey University - Massey Business School

Date Written: June 1, 2019


This paper examines whether managers of firms that engage in high levels of tax avoidance (TA) strategically reduce their financial statement readability (FSR) to mitigate the risk of exposing their TA strategies. On average, results are inconclusive, but mainly hold in the sample of firms with low effective tax rates (i.e., high TA levels). Specifically, focused on firms with above-industry-median TA, the panel regression results show a negative relation between TA and FSR, and the difference-in-differences analysis, based on the “Check-the-Box” regulation in 1997 that exogenously increases tax planning opportunities, suggests the negative impact of TA on FSR is likely causal. The relationship is stronger for firms faced with a greater likelihood of tax audit ex ante, firms in industries with a higher tax risk, and firms with a larger institutional ownership. The evidence adds to our understanding of the influence of corporate TA on financial disclosures.

Keywords: tax avoidance; financial statement readability; tax audit risk

JEL Classification: G18; G21; H26; M41

Suggested Citation

Nguyen, Justin Hung, Tax Avoidance and Financial Statement Readability (June 1, 2019). European Accounting Review, Forthcoming, Available at SSRN: or

Justin Hung Nguyen (Contact Author)

Massey University - Massey Business School ( email )

New Zealand

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