Tax Aggressiveness, Market and Idiosyncratic Risks in Brazil

23 Pages Posted: 3 Jun 2019

See all articles by Antonio Lopo Martinez

Antonio Lopo Martinez

University of Coimbra; University of Salamanca

Welliton Botão Martins

affiliation not provided to SSRN

Date Written: May 11, 2019

Abstract

This study aims to analyze the relationship between tax aggressiveness and the risks associated with the variation of returns in Brazilian companies’ stock, particularly regarding the systematic and idiosyncratic risks. The sample was formed by companies that composed the IBOVESPA index in the period between 2011 to 2016. The measurements of tax aggressiveness were the effective tax rate and the temporary book-tax differences. The results showed a significant relationship between tax aggressiveness and risk, concluding that the higher the tax aggressiveness, the lower the beta and the higher the idiosyncratic risk. The finding for the direct relationship between tax aggressiveness and idiosyncratic risk is in line with the literature, reflecting the dispersion of probable returns due to tax deferral practices and associated tax risks. The inverse relationship between market risk and tax aggressiveness may represent a greater attractiveness for these stocks in investment portfolios that seek less exposure. Tax aggressive firms would behave as a hedge in a diversified portfolio because they are less sensitive to market variations. This study is essential because it maps the effect of tax aggressiveness on the financial risks related to Brazilian companies’ shares, as well as being useful to investors, portfolio and business managers.

Keywords: Tax aggressiveness; Market risk; Idiosyncratic risk

JEL Classification: K34, M40

Suggested Citation

Martinez, Antonio Lopo and Martins, Welliton Botão, Tax Aggressiveness, Market and Idiosyncratic Risks in Brazil (May 11, 2019). Available at SSRN: https://ssrn.com/abstract=3386718 or http://dx.doi.org/10.2139/ssrn.3386718

Antonio Lopo Martinez (Contact Author)

University of Coimbra ( email )

Pátio das Escolas
Coimbra
Portugal

University of Salamanca ( email )

Campus Miguel de Unamuno
Salamanca, Salamanca 23007
Spain

Welliton Botão Martins

affiliation not provided to SSRN

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