Corporate Tax Avoidance and Annual Report Tone Ambiguity

Posted: 22 Mar 2021 Last revised: 29 Mar 2021

See all articles by Jin Lei

Jin Lei

Brock University - Goodman School of Business

Tanya Y. H. Tang

Brock University

Wei Wu

Cal Poly Pomona

Date Written: May 20, 2020

Abstract

We examine how corporate tax avoidance relates to the tone of narrative disclosure in annual reports. Using a difference-in-differences matching approach, we find that firms engaging in more tax avoidance issue more ambiguous annual reports. The positive relation is more pronounced for firms with higher audit probability, greater analyst coverage, and weaker internal monitoring. We further find firms with greater tax avoidance are associated with earlier and more frequent voluntary disclosures to investors. Our findings indicate that tax-avoiding firms’ disclosure decisions are determined by the tradeoff between the benefits of reducing information asymmetry and the costs of tax-based proprietary information.

Keywords: tax avoidance; disclosure tone; mandatory disclosure; voluntary disclosure; textual analysis; readability

JEL Classification: G32, G34, M41, M42

Suggested Citation

Lei, Jin and Tang, Tanya Y. H. and Wu, Wei, Corporate Tax Avoidance and Annual Report Tone Ambiguity (May 20, 2020). Available at SSRN: https://ssrn.com/abstract=3789719

Jin Lei (Contact Author)

Brock University - Goodman School of Business ( email )

500 Glenridge Avenue
St. Catharines, Ontario L2S3A1
Canada

Tanya Y. H. Tang

Brock University ( email )

500 Glenridge Ave.
St. Catherines, On L2S 3A1
Canada

Wei Wu

Cal Poly Pomona ( email )

3801 W Temple Ave
Pomona, CA 91768
United States

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