Conforming Tax Planning and Firms’ Cost Behavior

Abstract

Using a panel of European private firms, we show that the reaction of operating costs to sales changes increases with corporate taxes, consistent with conforming tax planning. We also find evidence of stickiness in conforming tax planning. Further, we show that conforming tax planning and stickiness of corporate tax planning vary in the cross-section: Firms with losses, firms with access to nonconforming tax planning, or firms with the ability to pass on taxes to stakeholders engage less in conforming tax planning. Altogether, our results suggest that conforming tax planning can affect reported pre-tax cost behavior.

Keywords: corporate taxes, conforming tax planning, cost structure, asymmetric cost behavior, tax avoidance, sticky cost

JEL Classification: D24, H22, H25, H32