Product Market Threats and Tax Avoidance

46 Pages Posted: 9 Aug 2019 Last revised: 8 Jul 2020

See all articles by Tae-Nyun Kim

Tae-Nyun Kim

The College of New Jersey, School of Business

Pil-Seng Lee

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance

Date Written: January 15, 2019

Abstract

In this paper, we investigate whether product market threats have a significant impact on firms’ tax avoidance. By adopting the market fluidity measure introduced in Hoberg, Phillips, and Prahbala (2014) as a proxy for product market threats, we find that product market threats increase the level of tax avoidance activities of the firms which are pursuing such activities more than their target tax avoidance level (actively tax-avoiding firms), whereas that impact is not significant for the firms which have not been involved in tax avoidance activities more than their target level. Accordingly, actively tax-avoiding firms delay their adjustment toward the optimal target tax avoidance level significantly when facing product market threats. In addition, among these firms with active tax avoidance practice, especially the firms with worse corporate governance structure, lower levels of monitoring, higher information asymmetry, and lower financial flexibility are more likely to experience the positive relationship between product market threats and their tax avoidance. Further evidence suggests that higher levels of tax avoidance driven by product market threats do not come with higher levels of tax uncertainty and positively affect firms' profitability.

Keywords: product market threats, tax avoidance, speed of adjustment, corporate governance, financial constraints

JEL Classification: G30, G34, H26

Suggested Citation

Kim, Tae-Nyun and Lee, Pil-Seng, Product Market Threats and Tax Avoidance (January 15, 2019). Available at SSRN: https://ssrn.com/abstract=3432725 or http://dx.doi.org/10.2139/ssrn.3432725

Tae-Nyun Kim (Contact Author)

The College of New Jersey, School of Business ( email )

Ewing, NJ 08628-0718
United States

Pil-Seng Lee

University of Texas at Dallas, Naveen Jindal School of Management, Department of Finance ( email )

800 West Campbell
Richarson, TX 75080
United States

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